Algorithmic trading

Subject – Economy

Context – SEBI mulls norms to regulate algo trading by retail investors

Concept –

Algorithmic trading (also called automated trading, black-box trading, or algo-trading) uses a computer program that follows a defined set of instructions (an algorithm) to place a trade.
The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader.
The defined sets of instructions are based on timing, price, quantity, or any mathematical model.
Apart from profit opportunities for the trader, algo-trading renders markets more liquid and trading more systematic by ruling out the impact of human emotions on trading activities.

Algorithmic trading in India

Algorithmic trading was introduced and allowed in India in 2008 by the Securities and Exchange Board of India (Sebi).
Initially, it started with Direct Market Access (DMA) and was restricted to institutional investors only, but due to the cost advantage and better execution, the trading community welcomed it with open arms.

Benefits of Algorithmic Trading

Trades are executed at the best possible prices.
Trade order placement is instant and accurate (there is a high chance of execution at the desired levels).
Trades are timed correctly and instantly to avoid significant price changes.
Reduced transaction costs.
Simultaneous automated checks on multiple market conditions.
Reduced risk of manual errors when placing trades.
Algo-trading can be back tested using available historical and real-time data to see if it is a viable trading strategy.
Reduced the possibility of mistakes by human traders based on emotional and psychological factors.