Algorithmic trading, also known as automated trading, black-box trading, or algo-trading, is employing a computer program to carry out trade in accordance with a specified set of instructions. Theoretically, the deal can produce profits at a pace and frequency that are beyond the capabilities of a human trader.
The specified sets of instructions are based on timing, cost, quantity, or any other mathematical model. In addition to providing the trader with possibilities for profit, algo trading increases market liquidity and makes trading more organized by minimizing the influence of human emotions.
A Look into Indian Algorithmic Trading
Algo trading was permitted by the Securities and Exchange Board of India in 2008. It was once only available to institutional investors, such as mutual funds, hedge funds, insurance firms, and so forth, but as it gained popularity, the retail sector began to adapt. Numerous brokers and fintech organisations offer Application Programming Interfaces (APIs) that enable users to build unique trading strategies or choose from a library of pre-built ones.
According to the NIFM research on algorithmic trading, which was released in 2018, 50% of client transactions use algorithms, while algorithms contribute about 40% to proprietary trading. Around 80% of transactions in established markets originate from algorithms. Algo trading has recently been the subject of SEBI concerns. In the current situation, the exchange allows the Algo presented by the brokers but has no control over where people develop their own utilizing the API provided by the brokers.
According to SEBI, any orders that are routed through APIs would be regarded as algorithmic trading. Each API engaged in algorithmic trading will be given a special Algo ID, which must be authorized by the stock exchange. Brokers must additionally provide a suitable control system to prevent improper usage, Algo modification, etc. According to SEBI, the unauthorized algorithm puts the market in danger since it might be used to manipulate the markets.
How Do You Begin Algo Trading?
Retail investors can start Algo trading in the way described below:
1. Recognise the market
Understanding the market is the first step in any type of trading. Get a thorough grasp of the instrument or market you may trade in before you start trading with algorithms so that you can develop a hypothesis on which to base your trades.
2. Study coding
If you don’t know how to code, you can study some coding languages like Python and come up with your own algorithm or hire professionals to do it for you.
3. Back-test Your Plan
Before using your algorithm, it must first be tested. Test your plan with high-quality historical data from reliable sources. In order to verify that your algorithms are effective, you may also employ third-party back-testing tools. You can modify your code depending on whether or not they function.
4. Pick the Best Platform
To execute your transactions, you must select the appropriate broker and platform in addition to your code. Choose a broker that offers a variety of tools you may use to refine your trading strategy and supports your algorithm.
5. Go Online
The next stage is to put your algorithm into real use after you are confident with it. Keep an eye on how it operates in the market and observe how it operates in the actual world. Your algorithm may not always perform as you expect. Following that, according to your needs, you might have to start over or make adjustments.
Advantages and Disadvantages of Algo Trading
|It’s common for trades to be carried out at the best rates.
|Real-time human judgment is lacking
|The placing of trade orders is precise and quick. To prevent substantial price swings, trades are executed swiftly and at the proper moment.
|Can occasionally cause a rise in volatility or market instability.
|Lower transactional expenses.
|High costs for developing and maintaining hardware and software
|Automated tests are being done in parallel under various market conditions.
|A higher level of regulatory scrutiny could be applied.
In order to open and finish deals based on computer code, algorithmic trading combines financial markets with software. The opening and closing times of deals are customizable by investors and traders. They can also employ computing power to engage in high-frequency trading.
In today’s financial markets, algorithmic trading is a popular practice, and traders have access to a broad variety of strategies. Get computer hardware, programming knowledge, and financial market expertise ready before you begin. There are several different algo trading platforms in India right now. Since not every platform is suitable for everyone, it is imperative that you pick the appropriate one for you.