Evaluating The Evolution Of Algorithmic Trading In India – A Prismatic View

The short name for automated or algorithmic trading is Algo trading. You can also call it black-box trading. Its idiosyncrasy emanates from the mode of trading it integrates. With the help of a few computerized algorithms that you program, you can execute trades on the stock market.

Algorithms are definite and definite instruction sets. With this type of trading, you can produce profits at tremendous speeds and frequencies.

Know the basics of algorithmic trading

You define a set of guidelines in an algorithm. They depend on the quantity, timing, price, or any other model that thrives on mathematics. In addition to generating revenue for investors, algorithmic trading produces great market liquidity.

Trading becomes a systematic and disciplined action as it removes the element and affects human emotions on trading practices. To enter the algo trading bandwagon, just open a Demat account and start your operations.

New trends of algorithmic trading

After SEBI spearheaded the opening of the country’s markets to algorithmic trading, it led to Direct Market Access or DMA. It permitted brokers to introduce their infrastructure and resources to non-retail consumers and customers.

  • These customers could place trades through algorithms. That was the first time when Algo trading in India had no human intervention.
  • Gradually, the market saw various models coming out of the arbitrage mechanism. They catered to Futures, Options, and Equities on the NSE and BSE.
  • Algo trading has increased the turnover percentage by over 50% on the BSE equity segment.

The importance of algorithmic trading

Algo trading helps stock market adherents and institutional investors maximize the benefits of spot fleeting and trade execution efficiencies. However, don’t negate their flipside. People often blame algorithmic trading for flash crashes and wild, unprecedented swings in the market.

  • When stocks or markets hit crucial milestones, for example, a 55-week high and low or a 250-day moving average, algo trading may spike many trades. It magnifies the concerning trend.
  • The problem with India is that it doesn’t have stringent rules for algo trading. The exchanges that utilize algo need approval from SEBI before using their programs.
  • The regulations are tougher now. Stock exchanges have no option but to allot a separate identifier for each algorithm post the approval.

Experts expect that it would help market control and surveillance.

Know your directive

Even if you’re yet to use algorithmic trading but are active in the market, it’s imperative to know how other investors use it. A persistent concern with algos and HFT is that if the program has a bug, many investors can suffer losses. Don’t forget the Muhurat trading climax in 2010, where chunks of the BSE derivative section had a hellish upsurge.

People attributed this incident to a glitch in the algorithm of one Delhi share broker. There’s no denying that typos and trade errors can lead to stock prices running riot, leading to piggybacking of algo trades.

Do remember that the success of your algo trading plans depend on your execution speed. It invariably depends on the connection bandwidth and the distance the various data segments are traveling.

Nicki Jenns

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