Algo Trading

Algo trading is mostly used by large institutional investors who need to buy and sell large volumes of shares on a day to day basis.

In this, the instructions-fed computers help them to make these trades and transactions at a much faster speed and at the best possible price.

Due to these reasons, algo trading has become quite popular among the institutional investors after being introduced in India in 2009 and leads to 35-40% of the turnover on the Indian exchanges.

This is staggering!

Recently, algo trading has seen a reasonable jump in usage among the retail investor base as well. Let’s understand how this concept has affected the lives of the trading community.

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How to Create Trading Algorithm?

Trading is a profession that requires extreme dedication, concentration and practical approach.

The person who enters the field of trading must ensure that he remains focused on all his trades at all times and does not let himself get affected by emotions like greed and fear.

The traders also need to be very knowledgeable of all the aspects of trading including the world economy, the historical data of a company and the effect that each factor can potentially cause on the prices of the shares or commodities or options.

Having said that, All this is easier said than done.

There are multiple instances wherein a trader loses his focus and concentration, and gets affected by emotions and psychological factors and ends up making decisions that he should not have made.

All these errors are humane and unavoidable.

Most of these drawbacks can be taken care of with the advent of technology and the use of this advanced technology in the field of trading. Algo trading is one such advancement.

Also, Read Top 9 Mistakes Made by Traders all the Time

Here are the brief knowledge and concept for creating algo trading.

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Algo Trading or Algorithmic Trading is the mechanism by which the computers (or software, sophistically speaking) are utilized to make the trades instead of humans.

The human intervention is kept to the minimum and the computer software is loaded with programs and algorithms to create trading strategies.

These trading strategies are then implemented to get optimum results.

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The trading instructions are pre-loaded into the algo trading software with reference to variables like time, volume and price.

The computer software then makes use of such information and makes trade according to the instruction given to it.

The algo trading, thus, becomes precise, accurate, well-timed well-executed, without any possible human errors.

Algo trading may be chosen to have a minimum to no human intervention. When there is no human intervention, they are called zero-touch algos.

The programs are pre-entered and as soon as the programs observe an opportunity to execute a trade, they do it immediately without any human control.

Another method is the Application Programming Interfaces (API), which is more commonly used in India.

In this case, the traders decide on their strategy, instruct the program and then they execute the trade using the information obtained through the API.

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Algo Trading Basics

The entire premise of algo trading works on speed and accuracy.

For a trader to make algorithmic trades, he must have access to a very high-speed network connection and a computer that is programmed with the prerequisites. The trader also requires feeds coming into the software about the stock market, prices, forex rates, and historical prices.

Speed is a very critical factor for algo trading; if the execution of the trade gets delayed even by milliseconds, the prices may get changed and the executed trade can look very different from what the trader wanted and expected.

This can lead to huge losses and you may be stuck up with open positions with no exit options. In order to ease the situation and make algo trading more accessible, SEBI has announced certain norms that ask the stock exchanges to allow co-location services to the traders.

By doing so, the traders and institutional investors can get their servers located on the same premises as the stock exchanges by paying rent and get much faster access to the stock exchange data. The exchanges have also been asked to provide tick-by-tick price data to the traders so that they know the best price and can take advantage of it.

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Trading Algorithms Examples

Let us consider an example of the criteria that a trader Rakesh who mostly uses while executing a trade.

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Rakesh uses moving averages as the technical indicator and buys the stocks of a company only when the 30-days ‘moving average’ price of the stock goes more than the 180-days moving average price and similarly, sells the stock when the 30-days ‘moving average’ price of the stock goes below the 180-days moving average price.

This criterion can be easily fed as a computer program into the software.

So, this algo will only buy a specified number of shares of the specified company, only when the 30-days moving average is more than the 180-days moving average.

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Therefore, Rakesh has specified the time, price and volume to the program as an algorithm and the software will keep on monitoring the price of the stock and execute the trade on the trader’s behalf as soon as the pre-specified criteria are met.

Rakesh does not need to keep a track of the prices and identify the trading opportunity, the algorithm does it for him.

Simple and efficient, right? Let’s learn more about it!

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Algo Trading NSE

Algo Trading was introduced on April 3rd, 2008 by the Securities & Exchange Board of India (SEBI). At the time it allows Direct Market Access facility to the institutional client.

Along with SEBI, NSE contributes a great part in taking algo trading to a more advanced level.

It started to offer additional co-location server ‘racks’  on lease to different broking firms in June 2010 that helps a lot by improving speed in trading.

Among different banks and broking firms, some of the foreign firms include:

• Deutsche Bank
• Citi Bank
• Morgan Stanley
• Goldman Sachs
• MF Global

The domestic firm which was provided with the servers were:

• Motilal Oswal
• JM Financial
• Edelweiss Capital

Gradually, Indian exchanges and regulatory bodies understand the concept of Algorithmic Trading thus increasing its demand.

The offering of Algo Trading by NSE helps in automating the trading domain thus assisting traders in doing investment.

Apart from this, analyzing the demand for algorithmic trading, NSE enables the Financial Information Exchange (FIX) protocol that helps in boosting the transaction speed for the investors residing overseas and using direct market access.

In all. the FIX protocol converts the language of orders given by the Foreign Institutional Investors (FII) into the language understood by NSE. This, in turn, reduces the execution time for the transaction.

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Algo Trading Apps

Now you can make the complex trading life simpler and easier by downloading the best algo trading apps.

After being the introduction of the concept of Algo Trading by SEBI and further, by NSE it has gained much demand.

There are many different software introduced from time to time that helps the trader to do trading in a seamless manner. Along with online software, there has been the introduction of different apps that help in algo trading.

Different brokers in India helped their customers to further simplify the process of algo trading by introducing different apps. The top trading apps in India are:

• Zerodha Streak
• ARQ Angel Broking
• FOX Trader
• SIANGLAB
• TICK ALGO
• Motilal Oswal Algo Trading

These apps help traders to strategically plan and to trade in the right direction.

For algo trading using an app, it is good to keep a few points in consideration like charges, live data fee with least delay, customize and set up the strategies as per their own desire.

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Algo Trading Software

Algo Trading is helpful to traders as it helps them to create algorithms that smoothen their functioning and help them to earn the profit.

For the best use of algo trading platforms, it is essential that the software is sophisticated and offers fast results.

Some of the essential features of the algo trading platforms are:

• Speed: The software used for algo trading must have a good speed.
• Connectivity: It should have good connectivity with various exchanges
• Data Availability: It must contain real-time data of the company and market.
• Customization: It should have a good provision for customization.

Some of the best algo trading platforms or Softwares being used are:

OMNEYS Nest: It offers various services including investment services, news, trading advice, etc.

ODIN: It is created to offer high performance, speed and to make intelligent error-free decisions.

ALGONOMICS: It has the ultra-low latency level which is helpful to investment banks, fund managers, and individuals to carry out trade in large numbers.

PRESTO ATS: It assists the trader to create, execute, deploy algorithms that in turn helps in dealing in all asset classes available in Indian Exchange.

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Algo Trading Broker

After understanding different software and apps for algo trading, the next important challenge that comes in front of traders is choosing the right algo trading broker.

Since the stock market has a long list of the broker who is competing with each other and all among them are trying to offer the best services.

This make it difficult for the trader to choose the right one.

Here are some of the features on the basis of which you are able to select the broker.

• On the Basis of API: Many brokers offer trading API which gets plugin with Ambibroker/Python/Excel etc. This automates the whole process of trading.

However, there are some brokers that offer API for free while others charge additional brokerage fees.

Here is the list of brokers and their respective API that helps them to offer Algorithmic Trading.

 

• Margin: Since API do involve certain risk associated with traders, therefore, expect high margin from the broker. However, you can negotiate the margin depending upon the exchange guidelines and trading style.
• API Stability: The most important factor that one should consider while choosing a broker is stability. Check for the stability of the broker and question them about their API servers to make sure that is worth choosing and trading.
• Monthly Charges: The next important consideration is the monthly API cost. This cost varies from broker to broker and ranges from zero to Rs. 25000 per id per month. It is always good to choose a broker with good stability and least monthly charges (brokerage + software charges).

Algo Trading Zerodha

However, algo trading is offered by many brokers and discount brokers including Zerodha being one of them.

Algo Trading Zerodha helps in streamlining the entire process of trading and also offers other multiple functionalities.

Also, it offers a tool called Zerodha Streak that allows traders to use the platform without even the knowledge of coding or programming.

You can use the platform efficiently and can make an algorithm in simple English. The entry and exit positions entered into the system are then converted into the codes automatically. Thus, it allows anyone to do algo trading.

Algo Trading with Zerodha also offers the feature of backtesting. Thus, as the entered and exit signals have met the software sends signals which then place an order.

Zerodha also offers you the AlgoZ that helps you to automate trading in Zerodha

Algo Trading Upstox

Upstox also offers its customers the provision and benefit of algo trading.

It makes use of a combination of REST and WebSockets that provide the live market quotes, orders and trades for the account.

The Upstox API offers low latency streaming data, real-time placement of order thus making trading simple and reliable.

MasterTrust Algo Trading

Although the broker is in a growing phase but offers robust trading benefits to its customers with its algo trading platform.

The broker offers software that helps the customer to do technology-driven trade and grab a better trading experience.

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Forex Algo Trading

Traditional or during the earlier days of trading, Foreign Exchange Market (Forex) trade was generally conducted over the telephone.

With the introduction of technological advancement, there is a big transformation in the Forex market. Now it is possible for traders to trade quickly over the computer thus enabling the retail traders to enter the market.

Also, online trading has led to better transparency in prices thus minimizing any fraud.

Along with all these transformations, another big change is brought by algorithmic trading.

Algo trading has brought much growth in the Forex market over the past few years.

The major reason behind this is the lower cost in carrying out processes like execution etc.

There is no doubt that automating trading with algorithm trading is more efficient and helpful than the manual execution.

Also, banks leverage this technology and make use of the updated prices of currency pairs online. Thus it improves the speed of quoting the market prices which in turn reduces the manual working hours.

Here are some of the key advantages of Forex Algo Trading:

• Reducing manual work
• Increasing speed
• Reducing risk exposure
• Lowering transactions cost

Apart from benefits, the Forex algo trading is associated with certain risks mentioned below:

• Imbalance in trading power that led to fragmentation within the market and shortage of liquidity with time.
• The quick response of algorithms towards the change in market conditions

In all with algorithmic trading, investors are looking forward to offering better transparency and exposure to price inconsistencies. This brings better and profitable opportunities for traders.

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Algorithmic Trading Returns

Assuming or getting a positive return is unrealistic since the trading is all about buying at the lower price and selling the same at a higher price.

Everyone enters into the trade with the objective of earning money and profit.

As a trader, you need to be very smart, knowledgeable, hard-working with years of experience.

No doubt you can expect returns with algorithmic trading but depending on software all for the same is not a good idea at all.

Give yourself time and earn a realistic per month return from algorithmic trading.

When trading in cash market returns can be lower but trading in Futures can give you high expectations in terms of return.

When it comes to options, then you may make money one day while losing some part of it another day.

If you are successful in developing a successful system deploying proper money management, keeping risk capital according to the system, and trading with the real money then you can end up making a good profit with algo trading.

In all algo trading involves only 10% algorithm while 90% part is being played by your skills and knowledge of money management, risk management, and zero emotions.

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Benefits of Algorithmic Trading

We have observed that algo trading is a new technology and it has multiple benefits over the traditional methods of trading.

Most of the benefits are related to speed, accuracy and cost reduction. The benefits of algo trading are:

Speed: The algorithms consider a variety of factors, parameters and technical indicators at the same time, analyze them and execute the trade within a fraction of seconds.

This high speed becomes very beneficial as the prices are captured as required by the trader.

The orders are entered within a few seconds and exit also becomes equally fast as soon as the stop loss is hit.

Accuracy: A huge benefit of algo trading is the minimum intervention of humans, which means a minimum possibility of errors.

The algos are checked and they do not get affected by human errors. A trader may make a mistake in analyzing the moving-average but the computer program does not.

Trades are executed as required with maximum accuracy.

Reduction in cost: With the use of algo trading, high volumes of trade can be executed at a time and this leads to a reduction in the transaction costs.

Increased market volumes: Since algo trading enables large volumes of shares to be traded within a few seconds, it increases the overall volume and liquidity of the market and makes the trading process more systematic and streamlined.

No Emotional Goof-ups: There are times when a trader ends up making the wrong decision because he was either too greedy or too scared.

He may have wanted to earn more profits or to reduce his losses, which made him change his trading strategy last minute and he needs up with monumental losses.

With the use of algo trading, the effect of emotions is minimized and the trading remains consistent and disciplined.

The algorithm will process the trade as indicated and the strategy will not be changed last minute due to what the trader feels.

The algorithms help the traders to plan the trade and then trade the plan without getting distracted.

Ability to backtest: One of the advantages of algo trading is that the new programs created are first backtested on the historical data to see if the strategy works or not.

On the basis of the outcome, the trader or programmer can make amends to the program and fine-tune it till it meets the requirements.

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Algo Trading Drawbacks

Just like all other forms of technology, algo trading also has its drawbacks. The biggest drawback is the dependence on machines and technology. If the systems or the machines fail, the entire trading set up becomes worthless.

The traders must learn how to create complex algorithms and at the same time, all the programs instructed may not actually end up working in a live scenario. Another big drawback of algo trading is that there is absolutely no control in the hands of the trader once the algorithm has been instructed and starts functioning.

Even if the trader realizes that the trade will lead to huge losses, he cannot intervene and change the program to stop making that trade.

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Conclusion

As a bottom line, like all the forms of trading, algo trading has its own pros and cons. The traders must be careful while creating instruction algorithms and use due diligence while applying them to real-life scenarios.

In case you are looking to get started with Algo Trading with one of the top stockbrokers in India, just fill in some basic details in the form below. A callback will be arranged for you:

 

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More on Share Market Education:

If you are looking to learn more about Algo trading concepts and strategies, here are a few reference links for you:

You can read this review in Hindi as well.