How Algorithmic Trading Can Revolutionize Stock Trading in India
The stock market is full of opportunities. Yes, there is nothing like holding a stock with conviction and watching it turn into a multi-bagger.
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But, as the stock market has become one big, complex beast, there are several alternative anomalies that can drive returns persistently, such as capturing a short-term trend or reversal pattern or using dip patterns. options to take advantage of short-term movements.
If you’ve tried these strategies manually in an ever-expanding market in terms of size and volume, chances are you’ll stop out of frustration.
But, if you enable your trading with technology and automation, you will find that you can lighten your trading burden and make it as comfortable as watching the grass grow or watching the paint dry.
That, in a nutshell, is the value proposition of algorithmic trading, and it will be game-changing for the stock market as Indian markets grow more and more.
Sonam Srivastava, Founder, Wright Research, SEBI Regd. RIA, decodes how algorithmic trading is also growing with the retail investor community and its impact on stock markets:
Of course, algorithmic trading is not new in India, but it is still in its infancy. Algos accounts for 70-80% of the overall global market volume and has various evolved structures, regulations and participants, whereas Algos still accounts for only 50-60% of the volume in India and is relatively simple and less understood.
Algorithmic trading only started in India around 2010 and was initially exclusively used by institutions and brokers. But recently, with the growth of digital discount brokers and API solutions, the retail market has open access to creating algorithms, and the opportunities are endless!
Algorithmic trading practitioners are multiplying, and awareness and education are becoming more structured.
However, there is still huge room for growth for Algos in India when you compare penetration with global markets.
Algorithmic trading is transformative in many ways – aside from profit opportunities for the trader, 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 why algorithmic trading takes precedence over manual trading are speed, accuracy, and cost savings. Algos can find patterns and trade fractions of seconds – faster than human perception, and when the machine follows predefined instructions, accuracy and precision are advantageous.
Moreover, the algo constantly monitors your orders without your supervision, which significantly reduces trading time and lowers transaction costs.
Types of methodologies:
Systematic trading is the form of algorithms that generally appeal to the majority. Trend watchers, hedge funds and pair traders find that programming their trading rules and automatically letting the software trade is much more efficient.
But aside from that, a huge area of trading where algorithms are used is execution and arbitrage. Mutual funds, pension funds and insurance companies are deploying algorithms to slice their orders when they don’t want to impact stock prices with discrete trades and large volumes.
And there’s arbitrage – the buying and selling of instruments that are highly correlated to make little money from the spread consistently and make the market more efficient in the process.
These algos can be high frequency – trading in milliseconds, or medium to low frequency – trading every few minutes or even daily!
Important categories of algos are – Trend following or momentum and Mean Reversion or range related trading.
Smart Beta – collecting investment from market inefficiencies in a rule-based manner is gaining traction in India. Arbitrage and Market Making – a method where you trade on both sides of the book is used by high frequency traders.
Rules and procedure:
Along with expanding markets, the regulation of algorithmic trading is also evolving in India. Recently, SEBI launched a consultation paper to make auto trading regulation more robust and beneficial to the end customer.
Like any developing industry, Algos has had its share of inefficiencies like the colocation scam or the predatory practice of some Algo traders.
But as the industry gained wider recognition, inefficiencies would be brought under control and algorithms would revolutionize markets with efficiency, fairness, and data-driven decision making.
(Disclaimer: Opinions/suggestions/advice expressed here in this article are investment experts only. Zee Business suggests its readers consult their investment advisors before making any financial decisions.)