The Effects of Technology on Investing
Computerized trading has changed the way return is captured, increasing technology's role in the investment process.
Algorithms are driving a revolution in the speed and efficiency that data is analyzed, in an effort to make better investment decisions.
Through our academic partnerships and research, we are building solutions to redefine passive investing, through enhanced indexing.
A move towards computerized trading
Computerized trading has changed the market and increasingly, market volume is moving toward high-frequency, algorithmic trading.
High frequency trading reached a near-term peak at 61% of all U.S. equity trading in 2009.
Fundamental discretionary traders account for only 10% of trading volume today.
The future of return capture
As computerization has changed how return is captured, a modern approach to how we invest has become more important.
Using data analysis is an increasingly greater component driving excess return.
Over time, we have seen manager alpha contribute a lesser portion of return in favor of factor selection.
Using algorithms to invest
An algorithm allows us to apply complex mathematical formulas to large sets of data, leading to improved investment decisions through process automation.
- A defined set of rules that use data to determine probabilities of an outcome.
- A way to package and use intellectual property, knowledge and insight in a efficient and ongoing form.
- Can be thought of as a functional solution to the market’s most complex analytical tasks, such as analyzing the data of a large group of stocks.
Rules-based investing works best with technology
As an investor, what is the most efficient way to determine which companies are doing well and are worthy of investment?
Rules-based investing is the process of determining what to look for when seeking the best companies in any particular index, sector, or industry group.
Once we have clarified the key characteristics that indicate a company’s success, we can create a screen based on academic principles, pattern recognition and business fundamentals.
As data has become more readily available, technology has enabled us to implement this system of evaluation better, faster and more efficiently, using algorithms.
The result is an evolution in index-based investing that we believe can benefit all investors, where the system selects the best scoring companies according to a defined set of rules.
Read about our Progress in developing modern investment solutions using these methods.