Wait Before Using That New Algo

While researching a story about the the trustworthiness of broker-dealer trading algorithms, one former buy-side and sell-side trader revealed what he thinks of new trading formulas from well-respected broker-dealers and sell-side firms.

I asked if he tests outside algos before using them. Here's what he said:

Trader: Whenever I was going to use a new algorithm, I wouldn't touch it for the first six months until they work all the bugs out.

Advanced Trading: Really? Back when you were a buy-side trader?

Trader: Yes, even on the sell side when you are offered an algo, you shouldn't touch it until all the bugs are worked out.

Six months?! I had assumed that once a new algorithm comes out that traders jumped on them the first chance they had but according to a few people I interviewed, no one wants to be the first to use a brand new formula. Also, don't algos go a bit stale? When Credit Suisse, Goldman Sachs or Deutsche Bank comes out with a new trading formula, it sounds like only the most risk-friendly of traders would use the new algorithm.

It reminds me of my kids standing outside the deep end of the pool of the swim club we belong to in Westchester. It may be hot outside and the water looks inviting but no one wants to be the first one to jump in.

No, thanks, they appear to be saying, you go first.