Seems you're confusing two different things there. You're combining HFT (High frequency trading) firms with Quant funds. While the two can, and often do, overlap to some extent, they're different in methodology and outlook.
An HFT is what you're talking about when you say an automated trading system. Basically the goal is to just make as many trades as possible in a trading day with a minimum profit margin on each trade set to account for tax events. Given that stocks are going up and down literally every second of a trading day, it's not that hard to make 20 cents a trade. But all those 20 cent trades add up when you're doing millions of them in a day. HFT's really don't do much to the market other than take advantage of technology to make split second trades faster than a human possibly can.
Quant funds on the other hand, they can and have almost destroyed the entire market before. They basically do what you said, they trade off of super complicated logistical quantitative algorithms. The smallest variable that the math nerds and programmers fail to account for can cause their whole system to collapse and take the fund down with it.
Look into LTCM if you want to hear a story about how Quant funds can cause market failures. They were a MASSIVE (as in the biggest in the world at the time level of massive) Quant fund in the 90s that at one point had over a trillion dollars under management due to a 25:1 leverage ratio. They collapsed when Russia defaulted on it's debt because all their models didn't account for any major nation defaulting on it's bond payments. Which resulted in the first government influenced bailout that set the stage for the 2008 bailouts.
Seems you're confusing two different things there. You're combining HFT (High frequency trading) firms with Quant funds. While the two can, and often do, overlap to some extent, they're different in methodology and outlook.
An HFT is what you're talking about when you say an automated trading system. Basically the goal is to just make as many trades as possible in a trading day with a minimum profit margin on each trade set to account for tax events. Given that stocks are going up and down literally every second of a trading day, it's not that hard to make 20 cents a trade. But all those 20 cent trades add up when you're doing millions of them in a day. HFT's really don't do much to the market other than take advantage of technology to make split second trades faster than a human possibly can.
Quant funds on the other hand, they can and have almost destroyed the entire market before. They basically do what you said, they trade off of super complicated logistical quantitative algorithms. The smallest variable that the math nerds and programmers fail to account for can cause their whole system to collapse and take the fund down with it.
Look into LTCM if you want to hear a story about how Quant funds can cause market failures. They were a MASSIVE (as in the biggest in the world at the time level of massive) Quant fund in the 90s that at one point had over a trillion dollars under management due to a 25:1 leverage ratio. They collapsed when Russia defaulted on it's debt because all their models didn't account for any major nation defaulting on it's bond payments. Which resulted in the first government influenced bailout that set the stage for the 2008 bailouts.