Algorithmic trading in India: Current State, Challenges and Future

Algorithmic trading in India

We posed the following question in-front of our experts in financial markets:

How do you think the Algorithmic trading is performing in India? And how you foresee it vis-a-vis the algorithmic trading in US?  The challenges facing the algorithmic trading in India, and its future?

But before we come to our question, here is a brief about Algorithmic trading and High frequency trading (HFT):

Algorithmic trading is the use of algorithms to generate orders based on certain conditions. In last 3 yrs, algorithmic trading has gained prominence in Indian Markets.

High frequency trading involves the use of these algorithms in placing orders in real time in stock exchange and utilising market inefficiencies for one’s benefit. Mostly arbitrage opportunities help HFT traders make small profits and since the volumes are high, even small profits help these HFT traders make huge gain!

Now, coming back to our question, in our view:

  • Algo trading in India is still in nascent stage. US and UK markets are way ahead of Indian markets.
  • The sentiment of Indian brokers/dealers towards high frequency/ algorithmic trading needs to change. They find it difficult to adapt to the new technology and do not want to give up their traditional way of trading.
  • All the exchanges require the algorithms to get an approval after which a broker can execute those algorithms. Among the Indian exchanges, getting approval from MCX is toughest and from BSE is easiest.

And now, let’s see what our experts have to say:

“Expect high sophisticated ALGO development, but likely focused on a relatively small number of liquid stocks. LIQUIDITY will define success of the effort. Regulatory issues could mushroom”

 “The key is to approach each market separate and tune the algorithms to specifically perform for that market.”

They further state that the approach to Indian market would consist of:

  1. Identifying the universe of stocks that drives the market and study over all the Indian market
  2. Speak to experienced “old school” traders and extract valuable information
  3. Create specific market rules which will drive the algorithms on the macro scale
  4. Build tailor made algorithms per each stock for the frequently traded stocks
  5. Build in local anti gaming techniques

It is evident that through algorithmic trading, investors will be able to customize algorithms and automate their trading strategies to serve best their objectives. This will allow them to access liquidity at an optimal price, alongside being able to reducing market impact and signaling risk.

But the move to introduce algo trading in Indian stock markets is being faced with many questions like the increasing volatility and the cost of its setting being a deterrent. But the shift to algorithmic trading will surely be better for the broader market, if not a few.