Algorithmic trading in India appears to have gained popularity over time. A growing number of people are considering this idea, it has 50-60% penetration.
The idea of algo trading is not brand-new and has been around for a while in industrialized nations like the U.K. and the U.S. Here is some information that will help you if you’re curious about algorithmic trading and whether it’s feasible to apply it in India.
Let’s start by giving a quick definition of algo trading.
What is algo trading?
Utilizing specifically crafted computer algorithms to carry out trades on the stock market is known as algorithmic trading. Algo trading aims to automate everything from trade considerations to order placement, in contrast to traditional trading, when each and every action and decision is made by hand. An excellent foundation or grasp of computer programming languages is required because it necessitates writing countless lines of computer code.
History of algorithmic trading in India
Algo trading was first made available to institutional clients on April 3rd, 2008, when the Securities & Exchange Board of India (SEBI) granted them access to the Direct Market.
In other words, DMA enables brokers to give clients access to their infrastructure and the exchange trading system without any involvement from them. Retail traders were not initially allowed to use it; only institutional clients could.
However, the facility decreased expenses for the institutional investor and improved execution by reducing the time needed to route the order to the broker and issue the required instructions.
On April 29, 2008, several of the biggest players in the world had already signed up for the DMA facility, making this facility popular. The organisations waiting for permission included FIs and FIIs like UBS, Morgan Stanley, JP Morgan, and DSP Merrill Lynch.
Along with other companies, Motilal Oswal Securities, India Infoline, and Edelweiss Capital have submitted their requests to the stock exchanges. It is important to remember that beginning on February 24th, 2009, foreign institutional investors (FIIs) were permitted to use the DMA service through investment managers of their choosing.
Leading brokerages and stock exchanges were laying the groundwork for the implementation of Direct Market Access by July 31st, 2008. (DMA). In an effort to synchronise their DMA software with the stock exchange’s systems, brokerages like Citi, Merrill Lynch, Morgan Stanley, JP Morgan, Goldman Sachs, CLSA, and Deutsche Equities had begun conducting test runs of their DMA software.
Due to the expansion of electronic trading platforms and the growing usage of technology in the financial sector in India, algo trading in india is getting more and more well-liked. Algo trading is widely used by traders and investors in India to execute deals more quickly and effectively and to profit from market opportunities that may be challenging to discover manually.
How to implement algo trading?
Now that you are aware of what algo trading is, let’s quickly review the general method that traders employ to put this strategy into practise. They start by creating a computer programme in one of the programming languages, such as Java, Python, or NodeJS. They can automate each and every trade action thanks to the manner this programme is made.
Algo traders, for example, can build a programme such that it automatically buys a predetermined number of shares of a stock when it crosses a resistance level or tests a support level and sells the same when it hits a resistance level or breaks through a support level.
The application they created is then integrated with their trading account. As a result, they can automatically place orders through their trading account from a custom computer programme without actually entering their trading platform. But integrating their application with their trading account also necessitates a lot of coding and can cause a lot of issues if done incorrectly.
So, is it possible to execute algo trading in India?
No doubt. There is no doubt that algo trading can be successfully implemented in India. Trading APIs are one of the finest and simplest ways to get started. Are you curious about that? Here are some details.
These trading APIs are provided by stock brokerage businesses to make it simpler for traders looking to start algo trading in India. APIs are essentially interfaces that let two or more separate computer programmes communicate with one other. These APIs eliminate the necessity for the trader’s computer software to be integrated with the trading account through the writing of intricate lines of code.
Trading APIs let you manage your account data, automate trade execution through your software, and access real-time market data streams.
How transformative is algorithmic trading?
Algorithmic trading is revolutionary in many ways. In addition to providing the trader with opportunities for profit, the algorithm also makes trading more systematic by minimising the influence of human emotions and errors. Additionally, it increases market efficiency and liquidity.
Speed, accuracy, and cost reductions are the main factors that make algorithmic trading more popular than manual trading. Algorithms can spot patterns and make trades in a fraction of a second, outpacing human vision. When an algorithm is used, accuracy and precision are favourable since the computer will follow predetermined instructions. Additionally, the algo continuously analyses your orders without your knowledge, which results in a significant time reduction for trading at lower transaction costs.
How do you begin trading algorithms in India?
Let’s now talk about where and how to start algorithmic trading in India, as well as some essential tools for learning algorithmic trading. Let’s start by discussing the qualifications.
India’s requirements for algorithmic trading-
1. Analytical skills
For any quant trader or developer, having an analytical mindset is crucial, and it is valued in an interview.
For instance, a candidate might be asked to extract patterns from a big quantity of data. Candidates are judged on their approach to a particular problem and their capacity to rationally defend their answers.
2. Mathematics skills
Since algorithms, data, and programming are at the heart of algorithmic trading, it’s critical for anyone looking for work in algo/HFT trading to possess reasonable programming abilities as well as a fundamental understanding of statistics and calculus.
For instance, an expert level of programming would be anticipated from a candidate if they were applying to a company that used low latency tactics.
3. Programming skills
Knowing a programming language, such as Python for Trading, is advantageous because it gives you the freedom to work on your own. The long-term consequences and advantages of coding, especially Python, are appealing to traders.
Python provides several modules for result validation and visualisation as well as being useful for conceiving and backtesting tactics. Additionally, businesses can utilise it for initiatives that don’t rely on low latency.
4. The strategy development process
To ascertain whether a strategy has an advantage in the markets, it is crucial to comprehend the risks and rewards involved with it before implementing it. This is carried out when a strategy is being backtested.
Before implementing the technique live in the markets, it is necessary to take into account the frequency of trading, the traded instruments, and leverage.
Profits are not always guaranteed by a single technique. To continue to be lucrative in the markets, one must continually develop and revise tactics employing cutting-edge mathematical models and statistics.
You can study about algorithmic trading methods, paradigms, and modelling concepts to comprehend diverse algo trading tactics.
5. Understanding the Financial Markets
Dealing with huge financial datasets and trading in a variety of products, including stocks, derivatives, FX, etc., are all aspects of quantitative trading. As a result, even if you have a background in technology unrelated to finance, you must have a basic grasp of the financial markets in order to work as a developer for a quant firm.
Typically, trading organisations need their new hires to spend time on several desks (such as the quant desk, trading, and risk management desks) in order to comprehend the markets.
Resources to learn algo trading in India-
Some helpful courses and publications specialised for algo trading are quite helpful for understanding the subject!
If you wish to adopt a learning strategy that is focused on teaching, the courses can be beneficial. On the other hand, books can benefit those who enjoy reading and learning thanks to the in-depth ideas they address.
Regulations on algo trading in India
According to audit requirements, algorithmic trade execution, and commodity markets, there are a specific set of laws and rules governing algo trading in India.
1. Criteria for Audits
Every algo trading business must pass a semi-annual audit, which can only be performed by CISA-certified Exchange empanelled system auditors who are listed on the exchange’s website. You must keep logs for orders, trades, control parameters, etc. over the previous few years in order to comply with the audit requirement.
You must now be aware that Indian exchanges particularly require the control parameters in order to determine whether or not the order’s strategy has been validated.
2. Execution Related
Here are a few instances of orders being carried out in accordance. First, it maintains that each order needs to have a special identity that the exchange has prescribed. Second, any new orders can only be carried out after taking into consideration any previously unfulfilled orders.
The exchange must approve any changes to the algorithms, and the system must have sufficient checks to stop the execution in the event of a loop or runaway.
3. Commodity Markets specific
Risk management procedures such as Daily Price Range, Maximum Order Size, Position Limit, etc., should be followed. Additionally, only limit orders may be made; market orders and IOC (Immediate or Cancel) orders cannot.
Algo trading does not accept mini or micro contracts. Additionally, all orders must be sent through member servers in India and from IDs that have been approved. These systems cannot be connected to any other systems or IDs that are located or linked outside of India.
Members are required to provide a document outlining how their strategy creates liquidity in the market. Members are also responsible for keeping all logs as described above, ensuring frequent audits, and obtaining approval before changing any existing tactics.
4. India’s future in algo trading
Beyond the potential for the trader to make good returns, algo trading is advanced in that it removes the influence of human emotions and errors, making it more systematic. Additionally, it increases market efficiency and liquidity.
What then will algo trading look like in the future?
The future of algo trading foresees that as the market expands, the resources for algo trading will develop and become organised and effective. Algo trading is currently used in 50–60% of Indian markets, although it is anticipated that this percentage will rise over time.
There are moreover these two forecasts for algo trading in India:
- Equities are predicted to make up $8.61 billion of the market share for algorithmic trading in 2027.
- Between 2021 and 2026, the algo trading market might expand at a CAGR of 11.23%.
Indian exchanges and brokers that provide algo trading platforms-
The National Stock Exchange of India (NSE) and the Bombay Stock Exchange are two exchanges and brokers in India that provide platforms and services for algo trading (BSE). Omnesys Nest, NOW, and Tradeplus are a few of the widely used algo-trading platforms in India. Sonam Srivastava, founder of Wright Research and a SEBI Registered Investment Advisor, advised traders and investors to thoroughly investigate and contrast various algo-trading platforms and services before selecting one.
Frequently asked questions about algo trading in India
1. Who can do algo trading?
Anyone who is proficient in a programming language (like Python), has market trading knowledge and experience, and has completed the necessary training can engage in algorithmic trading.
2. In India, is algo trading permitted?
“Yes” is the straightforward response to this query.
3. Which algo trading in India is the best?
Top 5 Best Algo Trading Software Rankings
4. Algo trading: is it profitable in India?
Today, automated trading algorithms account for 80–85% of trades in developed markets. In contrast, penetration in India is still at between 50 and 55 percent.
5. Will SEBI ban algo trading?
However, Sebi does not outright forbid algo trading. It only forbids publishing promises of previous earnings or anticipated future returns that are based on algorithms and provided by organisations not under Sebi regulation.
6. What kind of coding is used in algo trading?
7. How effective are algorithmic traders?
A career in algorithmic trading can be very lucrative.
However, there is some risk involved. Algorithmic traders need to have a thorough understanding of the markets and trading methods they employ. Additionally, to ensure that their trading methods are reliable, they must be able to successfully backtest them.
8. Compared to trading, is algo trading better?
Limiting human fallibility There is less chance of making mistakes when placing deals because Algorithmic Trading in India follows predetermined instructions. This reduces the likelihood that human traders may err due to emotional or psychological considerations.
9. Is a degree required to work as an algorithm trader?
To stand a chance, you must have achieved great academic success at a prestigious university. A master’s degree would have likely been sufficient ten years ago, and twenty years ago you could become an algo trader with just an undergraduate degree. Nowadays, getting hired without a PhD is significantly more difficult.
Algorithmic Trading in India Although India did not pioneer algo trading, its use has become more widespread ever since SEBI permitted the equity markets to adopt cutting-edge technology.
In order to do financial operations, traders now have access to algo trading platforms, tools, and software.