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Ned Davis Research founder says 'algos' have ruined day trading

Key Points
  • "I wouldn't touch it with a 10-foot pole now," says Ned Davis about day trading. 
  • When he was a day trader, Davis says, he was able to take advantage of inefficiencies in the market and make money off of them. Now, algos compensate for them almost instantaneously.
  • "They've taken the short-term [opportunities] out of the market. I've just gotten more and more long term," he says.
Jasper Juinen | Bloomberg | Getty Images

Ned Davis, the founder of his namesake research firm, found success as a day trader for about three decades. But now, he wouldn't even try it.

"I wouldn't touch it with a 10-foot pole now," Davis said at the company's annual investment conference in Boston on Tuesday.

The reason for that is "algos," he said.

Algos (short for algorithms) refers to computerized trading, where a computer executes trades in fractions of a second if certain conditions are met. For example, if the breaks below its 200-day moving average — a key level closely watched by traders — then the algo would sell shares of the SPDR S&P 500 ETF Trust, which tracks the broad index.

They are a faster and much more cost-effective way of trading and they've also made it nearly impossible for humans to find an edge to exploit, Davis said: "The algos have taken all of the inefficiencies out of the market."

When he was a day trader, Davis said, he was able to take advantage of inefficiencies in the market and make money off of them. Now, algos compensate for them almost instantaneously.

"They say you can't make money day trading. I did it for 30, 33 years," the 73-year-old Davis said. But "they've taken the short-term [opportunities] out of the market. I've just gotten more and more long term."

The proliferation of algorithmic trading has skyrocketed in recent years. J.P. Morgan estimated in 2017 that about 90% of daily trades are done by computers, while only 10% are executed by regular stock pickers.

Algos have faced lots of criticism for creating volatile swings in the market. In December, billionaire investor Leon Cooperman said the Securities and Exchange Commission should investigate computerized trading, noting it has created a "Wild West environment in the stock market. "

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