Algo trading, which is synonymous with Algorithmic Trading, is a futuristic technique that involves utilising super-smart automated programs and sophisticated algorithms to make lucrative trades. Say goodbye to manual trading, and hello to the era of cutting-edge technology! It consists of the use of technology to execute trades based on pre-defined parameters in live markets. It is becoming increasingly popular among professional traders, High Net Worth Individuals (HNIs), and even retail traders. Let’s discuss the basics of algo trading and its growing importance in Indian financial markets.
What is Algo Trading?
Algo trading refers to the use of algorithms, written in the form of code, that execute trades based on pre-defined rules and logic set by the trader. These programs or algo strategies are integrated with the trading platforms, making it an automated trading platform. It gives a systematic and disciplined approach to trading with the use of technology. It removes human emotions and errors and helps maximise returns on investments.
Why is Algo Trading So Popular?
The need for algorithm trading is rapidly increasing due to increased market volatility and changing dynamics. The execution using algo is done with immense speed and accuracy, making it a preferred choice of professional traders and HNIs. In addition, Algorithm Trading provides a systematic and disciplined approach to trading, which is crucial in today’s dynamic market environment.
Algo Trading in Indian Markets
Although algo trading is relatively new to Indian markets, it has been around in developed global markets since the mid-1980s. In developed global markets, approximately over 75% of trading volumes are done using algo platforms only. India got introduced to algorithm trading in 2008, and since then, its growth has been very promising, particularly for professional traders who follow a systematic and disciplined approach to trading.
Starting the Algo Trading Process
The process cycle to start algo trading involves developing a trading strategy conceptually, getting it coded into an algorithm/program, testing its functionality, and finally integrating it with the trading platform to make it live. With fast technological advancement, it’s now possible to back-test the strategy developed to test on historical data and have an idea about its performance under varied scenarios in the past.
The regulatory body for Financial Markets in India, SEBI, is quite prudent with the regulations in this domain. From time to time, it issues guidelines and frameworks about the use of Algorithm Trading, to make it more acceptable and inconspicuous.
The buzz around automated trading is getting louder, with retail clients’ interest and participation skyrocketing. And you better believe it, this trend is expected to continue gaining momentum in the near future, thanks to its undeniable advantage over traditional trading methods. In addition, the growing income levels in the country and the growing interest of the young generation in the financial markets also make it a more popular and preferred choice to trade with the smarter edge in the financial markets.
Algo trading is an excellent tool for traders who follow a systematic and disciplined approach to trading. With dynamically changing environments and better technology, Indian financial markets are evolving with better opportunities for professional and disciplined traders. The potential opportunity and constant growth of algorithm trading make it a preferred choice for investors looking for an edge in the financial markets.
Team Quantlab Wealth