You will never know every line of code behind those decisions, nor do you need to. What matters is recognizing that under certain conditions the machines are likely to be forced in a particular direction, and when too many of them respond to the same signal at once, the initial move can overshoot remarkably quickly.
How to Beat the Machines Before They Beat You
I spent roughly the final fifteen years of my career helping build what I sometimes jokingly describe as the modern retail trader mousetrap, so perhaps I am partly responsible for creating some of the machinery that now makes life so difficult for the person sitting at home staring at a flashing price screen.
It is also why I get asked so often how an ordinary trader is supposed to compete with the algorithmic horde that now dominates price action around payrolls, CPI, central bank decisions, geopolitical headlines and just about every other piece of information capable of moving a market.
The first answer is simple. You are not going to beat them at their own game.
When payrolls hit the screen, machines are reading the number, comparing it with consensus, checking revisions and firing orders across rates, currencies and equities before a human trader has finished processing the headline. Trying to win that race is pointless. You might as well challenge a Formula One car to a sprint because you have been doing extra hill sessions.
But that does not mean the machines are unbeatable. It means you need to stop competing where they have an overwhelming structural advantage.
Vineer Bhansali made this point essentially nearly a decade ago in How to Beat the Machines Before They Beat You. The technology has changed dramatically since then, but his central observation still holds. Algorithms are fast, disciplined and unemotional, yet the very qualities that make them so powerful also make them predictable.
They have reaction functions.
Volatility reaches a certain level, and exposure may need to come down. A trend strengthens and systematic money adds to it. Price levels break, and stops begin to fire. As an options book moves through a particular zone, dealers have to adjust their hedges. An economic number lands far enough from consensus and short-term models respond immediately.
You will never know every line of code behind those decisions, nor do you need to. What matters is recognizing that under certain conditions the machines are likely to be forced in a particular direction, and when too many of them respond to the same signal at once, the initial move can overshoot remarkably quickly.
That is where the discretionary trader can start playing a different game.
One of the biggest mistakes retail traders make around major news events is believing they must participate in the initial move. Payrolls print strong, the dollar jumps, and suddenly there is a feeling that the trade has already left without them. CPI comes in soft, bonds rally instantly, and the instinct is to chase.
Let the machines have that move.
They spent billions building the infrastructure to capture those first milliseconds. Unless your server is sitting beside theirs, you are not getting them back.
The more interesting part often comes afterwards, when the market starts showing you how positioning has absorbed the news.
A strong payroll number and the dollar jumps. Fine. Now what?
Do Treasury yields confirm it? Does USD/JPY hold the move? Does gold respond the way it should? Is the dollar rally broad, or does it start leaking lower almost immediately?
That is where the information begins to improve.
The machine has already processed the headline. What you are now watching is the market processing the machine.
And sometimes the most valuable signal is what does not happen.
A strong number and the dollar cannot rally. A weak number and bonds refuse to go higher. Oil spikes on a geopolitical headline and then gives it all back. Gold should be falling with real yields, yet sellers cannot push it down.
Those failures tell you something about positioning that the headline itself never could.
The news tells you what happened. The reaction tells you who was leaning the wrong way before it happened.
This matters because modern markets are increasingly filled with strategies responding not just to information but to one another. Rising volatility can force risk reduction, pushing prices lower and raising volatility further. Stops begin firing, trend models respond, options hedges change, and liquidity becomes thinner just as more orders are arriving....
....MUCH MORE
Related:They raise a couple interesting points, known to our readers but laid out very succinctly:
1) If you react to each and every headline dropping out of your fancy low-latency, machine-readable feeds you will worry yourself sick and not get anything done.
2) Intertemporal arbitrage.*
January 2016 - *"How human traders will beat the machines"
*****
I know I think about time-shifting more than the the average person.
Okay, truth be told, despite a predilection for really fast 'puters I obsess about outsmarting the machines.
I mean, what normal person types this headline "'Facebook, Google, and the Economics of Time' (FB; GOOG)" and follows it with this opening sentence: "Although this story is not about intertemporal arbitrage I'm sure that's the first thing some of our readers thought of."
Or gets giddy with "Intertemporal Arbitrage: 'Winning Big by Playing Long-Term Trends" (CNI; PNR)?
So be it.
See also the introduction to 2013's "UPDATED--The Economist On How the Commodity Quants Lost It:
...The bolded bit points up one of the failures of the fund managers.They get paid to figure out the intertemporal arbitrage, a fancy way of saying the task at hand is to understand the time period that gives the fund the greatest advantage versus the market..
The classic example is the individual investor realizing that he can't compete with HFT and looking at longer than nanosecond time periods. This opens up the possibility of not just not-competing with the traders with the lowest latency but of taking advantage of mispricings caused by their behavior. This is exemplified by one of Buffett's baseball metaphors (he has quite a few):
"In investments, there's no such thing as a called strike. You can stand there at the plate and the pitcher can throw a ball right down the middle; and if it's General Motors at 47 and you don't know enough to decide on General Motors at 47, you let it go right on by and no one's going to call a strike. The only way you can have a strike is to swing and miss."Now for a fund manager it get's tricky writing the quarterly report and saying "We didn't do much in Q3, we're waiting for Mr. Market to give us the high hanging curve ball" but if you've been honest with the investors that the tactic you've pulled from the toolbox is akin to the military's hurry-up-and-wait sense of time it is doable.
The point is, you don't have to be at the market every second You are afforded the luxury of just waiting for the perfect pitch.
As a side note anyone who considers a move that is measured in weeks to be a trend is nuts. A trend is John Templeton going into the Japanese markets at 2 times earnings and catching a 40-fold move 1965-1989....
Right on up to June 2026 on how to win the game by not playing the game:
Markets: "You See What You Want To See And You Hear What You Want To Hear"
A quick scan of the market commentariat finds arguments that the living will envy the dead at one extreme to:
at the other.
However, the thing to remember about markets is: You don't have to do anything....
