Home/ Markets / Stock Markets/  How algo-trading is changing the way people invest in the stock market in India?

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 make trades 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 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 nascent stage. According to Ram Kalyan Medury, Founder & CEO, Jama Wealth, SEBI Registered Investment Advisor algos account for 70-80% of overall market volume globally and have various evolved structures, regulations, and participants. However, algos are still doing only 50-60% volume in India and are 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!" he said.

“In India, algo-trading is becoming increasingly popular due to the growth of electronic trading platforms and the increasing adoption of technology in the financial sector. Many traders and investors in India use 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 at Wright Research, SEBI Registered Investment Advisor.

How algorithmic trading is transformative?

Algorithmic trading is transformative in many ways - apart from profit opportunities for the trader, the algorithm makes trading more systematic by ruling out the impact of human emotions and errors on trading activities. It also makes the market more efficient and liquid. 

The primary reasons algorithmic trading takes over manual trading are - speed, accuracy, and cost savings. Algos can find patterns and trade-in fraction of seconds - faster than human perception, and when the machine follows predefined instructions, accuracy and precision are advantageous. In addition, the algo monitors your orders continually without your oversight, leading to considerable time reduction for trading lower transaction costs.

Benefits of algo-trading

One of the main benefits of algo-trading is that it can help traders make more informed decisions by analysing a more significant amount of data in a shorter period, said Ram Kalyan Medury.

This can be especially useful for traders needing more time or resources to analyze large amounts of data manually. Additionally, algo-trading can help traders execute trades more quickly and efficiently, which can be especially important in fast-moving markets, he added.

Drawbacks of algo trading

However, algo-trading also has its drawbacks. “One potential risk is that the algorithms may only sometimes make the best decisions, especially when the market is highly volatile, or there is a lack of historical data on which to base decisions. Additionally, algo-trading can make the markets more susceptible to rapid price movements, as the algorithms may respond similarly to certain market events," said Ram Kalyan Medury

Exchanges and brokers in India that offer algo-trading platforms in India

“There are several exchanges and brokers in India that offer 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 include Omnesys Nest, NOW, and Tradeplus. It is important for traders and investors to carefully research and compare different algo-trading platforms and services before choosing one, as fees and features can vary significantly," said Sonam Srivastava, Founder at Wright Research, SEBI Registered Investment Advisor.

Risks associated with algo-trading

Algo-trading is not without any risks. “The potential for errors or malfunctions in the algorithms or computer systems used to execute trades, could lead to losses for investors. Additionally, algo-trading may be vulnerable to market manipulation and other forms of fraud. We have heard of the infamous NSE Scam recently," said Sonam Srivastava.

It is important for investors to carefully consider the risks and potential benefits of algo-trading before making a decision.

Sangeeta Ojha
A business media enthusiast. Writes on personal finance, banking and real estate.
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Updated: 26 Dec 2022, 10:39 AM IST
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