Retail algo trading space is fast filling up in India

Automated trading, algorithmic trading or machine trading generally mean the same, where an electronic trading platform with pre- programmed trading instructions makes it possible to execute trades directly from the platform or through API’s linking third- party softwares; charting softwares, programming languages or simple Excel spreadsheets.

The idea is to execute trades with minimum or zero human intervention and the concept has a number of takers in the country with a large number of retail traders choosing to automate strategies to minimise human emotions, compelling brokers to scale up their systems to include automated trading as a part of their broader offerings.


Source: Compositedge- Protrader terminal

 

Algorithmic trading has been in existence for more than a decade in the Indian financial markets, although their usage has been limited to a few hedge funds and portfolio managers. However, in the last couple of years, retail participation has increased dramatically and according to the National Stock Exchange (NSE), around a third of all trades placed on the exchange terminals are by market participants using the automated trading approach. The reasons for the popularity of algo trading over conventional trading are manifold- In addition to speed, accuracy, ability to back-test, paper trade & absence of human emotions, algo traders are not required to monitor markets endlessly, often resulting in healthier ROI’s.

 


Source: Compositedge- Protrader terminal

 

Although automated trading systems have a number of advantages, there are a few disadvantages too. A couple of the them are highlighted below

 

  • Algo trading generally requires a strategy to be programmed in a specific language. Not knowing to program / code can be one of the major disadvantages as traders involuntarily have to depend on programmers to complete the task for them.
  • Traders using automated systems have no control on the way the program would run in certain market conditions. Since trades are automated, one generally does not feel obligated to monitor markets constantly, but if the program runs in a way that is contrary to the strategy, it could result in massive losses.

However, the drawbacks can be overcome by testing the system thoroughly using both in- sample and out- sample data before presenting them in real- time markets. Traders should monitor the system for a few months to make sure it performs as programmed in all market conditions. After all, the advantages of using automated trading are numerous compared to the negatives, which can be taken care of by having a few safety features in place.

Following are some of the FAQ’s related to algo trading in India

What is the process & arrangement for retail investors carrying out automated trading in India?

All retail traders and investors are permitted to implement trades using pre- programmed strategies. If human intervention is required to execute trades, exchange approvals are not mandatory. However, if trading is carried out without human invention using robots or pre- programmed softwares, prior approval from the respective exchange is necessary. A trading/ clearing member of the exchange can receive approvals for algorithmic trading from the designated Exchanges on behalf of their clients.

What are the investments involved in setting up a fully functional automated trading platform for an individual?

Setting up a retail automated system is not as simple as a conventional online platform and not as expensive as it sounds. The costs are a combination of one- time charges and recurring, depending on the selection made by the trader.

Mentioned below are some of the costs retail traders generally incur to set-up an automated trading platform-

1. Subscription to third party softwares
2. Coding costs
3. Costs associated with the automated trading platform
4. Hosting charges

What are the charting software’s and programming languages that can be currently integrated with Algo platforms in India?

Charting softwares-

  • Ami-broker
  • MT4

Gateway API’s-

  • Python
  • MS- Excel
  • XML
  • Dot-net
  • Java
  • HTML
  • C#