Algorithmic Trading

About Algorithmic Trading:

  • It is also called automated trading, black-box trading, or algo-trading.
  • Algo trading is computer assisted buying and selling of stocks.
  • It uses a computer program that follows a defined set of instructions (an algorithm) to place a trade.
    • The defined sets of instructions are based on timing, price, quantity, or any mathematical model.

Status in India:

  • Algo trading came to India in 2008, but only savvy traders were using it then. Retail traders have started using advanced algos for trading mainly in the past five years.
  • Around 50% of the daily trading volume in Indian stock markets is through an advanced form of algo trading where computer programmes execute trade orders based on pre-defined strategies.

SEBI’s stand on Algos:

  • Unlike broker terminals which are regulated and monitored by SEBI and Srock exchanges, Algo programmes deployed by traders did not require any exchange approvals so far as there were no rules.
  • But SEBI now believes that unregulated/unapproved algos pose a risk to the market and can be misused for systematic market manipulation as well to lure retail investors.

SEBI’s proposals on Algo Trading:

There is a need to create a regulatory framework for algo trading.

  • For this, all orders emanating from an APIs (Application Programming Interface) should be treated as an algo order and be subject to control by the stockbroker.
  • APIs carrying out algo trading should be tagged with the unique algo ID provided by the stock exchange.
  • All algos developed by any entity has to run on the servers of brokers, wherein the broker has control of client orders, order confirmations and margin information.
  • The stockbroker is responsible for all algos emanating from its APIs and redressal of any investor disputes.

Benefits:

  • The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader.
  • Algo-trading renders markets more liquid and trading more systematic by ruling out the impact of human emotions on trading activities.
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