Algo trading is an automated facility where trading is carried out by computer driven algorithms designed by traders. Instead of the traders manually doing so, it is these algorithms that determine which orders – to buy or to sell – get booked. The high speed – transactions can take as little as 18 microseconds – at which such trading takes place, gives it a competitive advantage over conventional manual trading. While a single trader can manually handle at best a portfolio of around Rs 5 crore, an algo trader, working alone, can cope with Rs 50 crore to Rs 55 crore.
Algo trading started in India in 2005. But it was only in 2008, after the Securities and Exchange Board of India (SEBI) allowed Direct Market Access, or electronic interaction with the order books of exchanges, that this facility started gaining wide acceptance. Today, around 16 to 17 per cent of trading on the Bombay Stock Exchange (BSE) and National Stock Exchange is algorithmic, with about 80 to 90 companies engaged in it. But many believe that in the next three to four years, the proportion could rise to 60 to 70 per cent.
Algo trading calls for two kinds of skills: strategy or domain knowledge, and code development. Domain knowledge means knowing stock trends in different sectors thoroughly, while code development requires a strong command of programming languages. Indeed, a background in coding is in high demand.