Algorithmic trading, or algo trading for short, has become increasingly popular in recent years due to its ability to process large amounts of data and trade at high speeds, allowing traders to take advantage of market opportunities.
What is algo trading?
Algo trading refers to the use of computer programs to automatically execute trades in the financial markets. These trades are based on predetermined rules set by the trader or a trading algorithm.
When did algo trading start in India?
Algo trading is not new in India, but it is still in its infancy. According to Ram Kalyan Medury, Founder and CEO of Jama Wealth, SEBI registered investment advisors account for 70-80% of the total market volume worldwide and have various evolved structures, regulations and participants. However, algos still only account for 50-60% of the volume in India and are relatively simple and less understood.
“Algorithmic trading only started in India around 2010 and was initially used exclusively by institutions and brokers. But lately, with the growth of digital discount brokers and API solutions, the retail market has free access to algorithm creation, and the possibilities are endless!” he said.
“In India, algo trading is becoming increasingly popular due to the growth of electronic trading platforms and increasing adoption of technology in the financial sector. Many traders and investors in India are using algo trading to execute trades more efficiently and quickly, and to take advantage of market opportunities that may be difficult to identify manually,” said Sonam Srivastava, Founder of Wright Research, Registered SEBI Investment Advisor.
How transformative is algorithmic trading?
Algorithmic trading is transformative in many ways – apart from opportunities for the trader to make profits, the algorithm makes trading more systematic by eliminating the impact of human emotions and errors on trading activities. It also makes the market more efficient and liquid.
The main reasons algorithmic trading takes over manual trading are – speed, accuracy and cost savings. Algos can find patterns and act in a fraction of a second – faster than human perception, and when the machine follows predefined instructions, accuracy and precision are beneficial. In addition, the algo continuously monitors your orders without your ignoring it, resulting in significant time savings for trading and lower transaction costs.
Advantages of algo trading
One of the key benefits of algo trading is that it can help traders make more informed decisions by analyzing a larger amount of data in less time, said Ram Kalyan Medury.
This can be especially useful for traders who need more time or resources to manually analyze large amounts of data. Additionally, algo trading can help traders execute trades faster and more efficiently, which can be especially important in fast-moving markets, he added.
Disadvantages of algo trading
However, algo trading also has its disadvantages. “A potential risk is that the algorithms only sometimes make the best decisions, especially when the market is very volatile or there is a lack of historical data to base decisions on. In addition, algo trading can make markets more vulnerable to rapid price movements as the algorithms can respond to certain market events in a similar way,” said Ram Kalyan Medury
Exchanges and brokers in India offering algo trading platforms in India
“In India, there are several exchanges and brokers offering algo trading platforms and services, including the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE). Some popular algo trading platforms in India are Omnesys Nest, NOW and Tradeplus. It’s important for traders and investors to carefully research and compare different algo trading platforms and services before deciding on one, as fees and features can vary significantly,” said Sonam Srivastava, Founder of Wright Research, SEBI -registered investment advisor.
Risks Associated with Algo Trading
Algo trading is not without risks. “The potential for errors or malfunctions in the algorithms or computer systems used to execute trades could result in losses for investors. In addition, algo trading can be vulnerable to market manipulation and other forms of fraud. We recently heard about the infamous NSE scam,” said Sonam Srivastava.
It is important that investors carefully consider the risks and potential benefits of algo trading before making a decision.
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