Previously
algorithmic trading did the simplest tasks rather faster, for example buying
something on one exchange and selling it on another, capturing the difference
of an arbitrage and gaining profit. It has got a bit more sophisticated using
futures or options, to create profitable trades that enter and exit in
milliseconds. Nowadays some of the algotrades are way too complex, using the
concepts of physics and developers with a PhD degree building the programs that
gains profit from analyzing news, announcements, or price movements around the
globe, with the help of artificial intelligence and computer learning.
On April 3rd
2008, Securities & Exchange Board of India (SEBI), introduced algorithmic
trading by allowing Direct Market Access to institutional customers. Direct
market access enables specialists to give their framework to customers and
gives them access to the trade exchanging framework with no interference. It
was given uniquely to institutional customers and not retail merchants from the
outset. Now algorithmic trading controls nearly one third of all trades.
There are pros
and cons of algorithmic trading, in India during a Diwali mahurat trading
session prices of certain derivatives plunge around 20%. Later it was
discovered, the reason was a faulty algorithmic trading software at a broker.
The trades of those derivatives on that day were annulled. On the other hand
algo trading has helped to reduce the cost of transaction for the investors as
well as increase the speed of the transaction.
But the advance
algorithmic trading has posed threats in the form of scams, one such scam that
happened in India was NSE Co-Location scam. The stock trade gave information to
representatives in a cooperative instrument, sending it first to whoever
associated with its exchanging framework first, and afterward to the subsequent
agent, etc. The person who got associated first would get the information first
and with innovation, even a second ahead of schedule was sufficient. Computers
could then gain enough from this "early" information to place orders
ahead of anyone else. In all, profits were made, and after an investigation,
even taken away from the people doing it. This issue was so complex that
without detailed information from a whistle-blower, it would have been
impossible to detect.
After such
incident, SEBI regularly comes with various rules and regulations that are to
be followed by the traders and brokers to keep the industry safe and risk
controlled. Risk management is critical with algorithmic trading. That is the
reason, for any calculation to be affirmed by the business sectors, trades
require a firm to experience a progression of stringent tests on the off chance
that it plans to exchange through algo exchanging.
Although there
have been a lot of issues, with several amendments over the years, India
provides a good opportunity for algorithmic trading due to a number of factors
such as co-location facilities and sophisticated technology at both the major
exchanges a smart order routing system and stock exchanges that are
well-established and liquid.
Thank you
Regards
Kevin Furia
Kautilya
IBS Mumbai
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