Algorithmic trading, or algo trade, has taken financial markets by storm. It is the next step of evolution of trading and, undoubtedly, tomorrow’s trading technology. It can help react to market events faster than the competition to increase profitability in trades.
If data is to be believed, the global algorithmic trading market size is projected to grow from $11.1 billion in 2019 to $18.8 billion by 2024, expanding at a CAGR of 11.1 per cent. Algo trading first entered stock markets in the mid-1980s. Currently, around 75 per cent of the trades across the globe are automated and algo-trading contributes a major chunk of that.
In India, Sebi allowed algo trading in 2008 and since then it has grown rapidly across the various asset classes. Algo trading has picked up in leaps and bounds and is seeing growing interest among large domestic and foreign institutional investors, who trade on proprietary books.
With the gift of technological advancement, this form of trading is picking up with more players and traders joining in every day. Now, option traders, strategists, proprietary traders, arbitragers, jobbers all are active in algo trading.
It would not be wrong to say algo trade can help you make money in microseconds, if you can get the programming right. Algo trading is a clearly defined set of step-by-step operations used for research and analysis as well as trade execution. Skills such as knowledge of financial markets, financial computing, statistics & econometrics and market microstructure are some of the basic requirements to foray into algo trading.
Algo traders create their strategies and then get them back-tested using historical data; a technique referred to alpha of the strategy.
While small traders are worried that algo trading will leave them behind or put their businesses at risk, the fact is it can benefit them, as algo trades increase liquidity in the market and, thereby, simplifies the entry and exit process.
Moreover, increasing depth of algo trading can remove price inefficiencies in traded securities. For instance, when the market or a stock hits a key milestone, such as 200-day moving average or 52-week high or low, algo trading may trigger a large volume of trades.
The opportunities on the arbitrage window are getting smaller day by day in the fight for speed, and algo trading has come in handy there. Despite increasing propagation of fintech solutions, trading is one area that hasn’t been completely automated.
There is more potential for algo trading to flourish in India. However, the future of algo trading adoption will depend on how the regulations and policies shape up. In India, the rules have become tougher. But algo trading continues to exhibit potential for growth in the times to come.