- [Instructor] Now that we understand
what algorithmic trading is, let's look at an example.
Renaissance Technologies is one of the most famous
hedge funds pursuing algorithmic trading.
Renaissance, or RenTech as they're sometimes called,
gave an example of the type of trade they pursue
at one point.
They cited that when skies are cloudy,
equity markets tend to perform worse
than when skies are clear.
In other words, blue skies are good for stocks,
gray skies are bad.
In theory then, we could buy or sell data
based on weather forecasts.
The reality is that practically speaking,
it's very hard to trade on weather patterns though.
For one thing they're imprecise
and the correlations are low.
Renaissance was simply using that as an example,
rather than an actual practical illustration
for where you could make money.
The correlations between stock prices and weather
are really too low for them to make sense in most cases.
But here's another better example.
Algorithmic trading can be done based on the relationship
between customers and suppliers.
For example, if we have a small under-the-radar firm
that reports earnings, frequently has implications
or read throughs for larger customers or suppliers
that are related to that company.
For example, think about Apple
and some of the small vendors it uses.
When a small supplier comes out and reports earnings,
that has implications for how many iPhones Apple will sell.
As a result, smart traders will look at what's going on
with Apple's suppliers and try to understand
how they should trade Apple based on that.
Now, that's been done for a long time.
Where algorithmic trading takes it to a new level
is by automatically incorporating all this information
in some sort of formulaic way
and then making a trading decision based on that.