Trading Systems Improves Market Liquidity

The use of trading systems, in general, is aneffective alternative to increase the liquidity of financial markets without,however, raise the speculative risk relatively.According to a study published in "The Journal ofFinance" in February 2011 entitled "Does Algorithmic Trading Improve Liquidity?" Provides a study which argues that the use of trading systems in the U.S.market enhances liquidity and informativeness of orders. In their studyestimates that for large stocks in particular, the use of trading systemsnarrow spreads, reduce adverse selection and reduces the uncovered positions.The trading systems nature provides this type of phenomenon.The diversity of trading systems can be compared with the diversity of marketparticipants, contributing to market efficiency.However, the trading systems have are different when itcomes to diversification. The development of a system undergoes maturation andenhancements that make emerge a variety of different rules and conditions, withdifferent timing. The systems allow an even greater diversification than manymarket players together. After developing a successful trading strategy, it ispossible to climb into other assets. If we take one simple example, where two tradingsystems with different timeframes, trading the same security can increase thevolume without increasing on the same rate the risk (because now we areconsidering the correlation between the models and not between the securitiesanymore and they have different buying and selling orders), contributing toincrease liquidity.The great difference is the scientific process in which the systemsare developed and to the systematically apply. Of course, the systems depend onmarket conditions to work as desired. A quantitative investment management,need to constantly manage the models that operate in that situation. In asituation of crisis, the systems can be switched to other more efficient forthis kind of scenario can be reduced and the exposure of assets to maintain thelevel of portfolio volatility.Several models can also be profitable in crisis situations.On high volatility periods, the market often distort much their prices,creating opportunities for arbitrage, for example, a strategy that profits fromthe difference in prices between different assets.