What is Algo Trading? To understand the movements of the stock market shares and the activities of the company, investors have to be constantly active. Investors take wrong decisions based on emotions, so their returns get reduced. In such a situation, Algo Trading is becoming very popular. This is new for India. Let us know what is algo trading and what are its benefits.
What is Algo Trading?
Algo trading is also called automated trading, programmed trading, or black box trading. This is done through a computer program, which follows an algorithm to make a trade. There is a general belief that it generates profits much faster and more often, which is not possible for a human trader.
The set of instructions used in this algorithm is based on timing, price, quantity, and a mathematical model. With its help, the opportunities for making profits for the investor increase. Algo keeps trading activities away from emotions. With the help of this technique, the market becomes more liquid and trading takes place in a more systematic manner.
How does Algo Trading work?
A large amount of trading in the Indian stock market is being done by the algo strategy. It is believed that in algo trading, the investor does not have to put any effort and he gets high returns. Let us try to understand Algo Trading with a simple example. A trader follows two simple trade parameters.
- First- he wants to buy 50 shares of a company when its 50-day moving average crosses 200-day moving average.
- Second- He wants to sell the shares in case the 50-day moving average falls below the 200-day moving average.
- Using both these instructions, a computer program automatically monitors the stock prices and places buy and sell orders.
- In Algo Trading, the trader does not need to constantly monitor the livestock prices and graphs. Nor does he have to place the order manually.
- This algorithmic trading system does this work automatically by correctly identifying the trading opportunities.
Advantages of Algo Trading
According to a report, more than 50 percent of the total orders coming in on NSE and BSE are algo trades. Large institutional investors and high net worth investors are making the most of algo trading. The advantages of algo trading are given below.
Trades are completed at the best possible prices.
Trade order placement is immediate and accurate at the desired levels.
Trades are made on time and promptly to avoid price changes.
Transaction costs are reduced.
Multiple market conditions can be tracked automatically at the same time.
The risk of margin of error while placing trades is greatly reduced.
Algo trading can be backtested using available historical and real-time data.
Algo trading can be used to find out whether it is a viable trading strategy or not.
There is no scope for emotional and psychological based mistakes in human trading.
SEBI Guidelines on Algo Trading
Capital market regulator SEBI has recently issued guidelines for brokers providing services related to algo trading to investors. The objective of this initiative is to curb the sale of shares by claiming ‘high returns. SEBI has fixed some responsibility on the brokers providing the facility of algo trading.
Brokers providing algorithmic trading services are prohibited from making any reference to past or future returns.
It is prohibited from being associated with any platform that makes any reference to the past or future benefit of the algorithm.
The stockbrokers who directly or indirectly provide information about past or future returns or performance of algorithms or are associated with the platform providing such information shall remove the same from the website within seven days.
There is a large-scale algo trading in India!
Let us tell you that large institutional investors and high net worth investors are making the most use of algo trading in India. This is why algo trades account for a large proportion of total orders. Many brokers also offer the facility of algo trading to investors. It is believed that algo trading has a good future. But experts believe that all this is not completely true.
Does Algo Trading Give Guaranteed Returns? No
Zerodha co-founder Nitin Kamat tweeted, “I think SEBI has done this because such platforms are luring customers with extraordinary returns through back-testing to woo them.”
He further added, “There is a misconception that algo trading gives guaranteed returns. Finding strategies that trade more often to appear profitable is not difficult. But in almost all cases, the high returns decline sharply or the returns are not visible once you account for the costs involved.”
SEBI last week published a circular asking brokers not to associate directly or indirectly with algo trading platforms that claim historical returns on strategies.
We want to reiterate that we don’t have any such partnerships. 1/7https://t.co/pxhLCDtuD4— Nithin Kamath (@Nithin0dha) September 6, 2022
FAQ:
Q: Does Algo Trading give guaranteed returns?
Ans: It is a misconception that algo trading gives guaranteed returns. Because the share market does not run on any algorithm.
Q: What is the future of algo trading in India?
Ans: Algo trades account for more than 50 percent of the total orders coming in on NSE and BSE.
Q: How to learn algo trading?
Ans: Today you can learn algo trading on the internet itself.