Can You Do Algo Trading in Zerodha?

Algo trading has become increasingly popular among many who seek to gain an edge in the stock market. As technology advances, many Indians are exploring the possibilities of automating their trading strategies to capitalise on market trends with high precision and speed. But have you wondered if you could do algo trading in Zerodha, one of the leading brokers in India? In this article, we’ll explore that very question!

What is Algo Trading?

Algo trading is a method of executing orders in the financial markets (stocks, derivatives-F&O, currencies, commodities, etc.) using automated or pre-programmed trading instructions. The 'algorithm' places orders based on specific rules and criteria, including price, timing, and quantity instructions. The trading algorithm follows the instructions to identify opportunities in the market and executes orders when the conditions are satisfied.

‘Algos’ can analyse market or trading data, track performance, and execute trades based on pre-set trading strategies without human intervention!

Here’s an example: Suppose a trader has a strategy to buy when a stock price surpasses its 50-day moving average and sell when it falls below. An algorithm can monitor the stock and execute these trades at lightning speed, saving considerable time and effort. This makes algo trading attractive to those interested in executing trades quickly or simply eliminating the emotional biases of manual trading.

Can You Do Algo Trading in Zerodha?

Zerodha is a leading brokerage firm known for its affordable and user-friendly platform for investing and trading. Established in 2010, they pioneered the discount brokerage model in India, offering a flat fee of ₹20 per executed order across various trading segments. This reduced the cost of trading compared to traditional brokers who charged a percentage of the trade value! Zerodha allows you to trade in stocks, derivatives, commodities, and currencies through its flagship platform, Kite.

Since 2019-20, there’s been a notable rise in retail traders engaging in algo trading in India. This growth is mainly driven by brokers and algo trading platforms offering Application Programming Interfaces (APIs) to help retail traders easily implement their trading strategies or execute trades. An API is essentially a set of tools and protocols that allow software to interact with brokers, trading platforms, and exchanges/data vendors to place orders automatically.

Here are two ways you can do algo trading in Zerodha:

1. Kite Connect

If you have basic coding or technical trading knowledge and are interested in algo trading, you can use Zerodha’s Kite Connect API to: 

• Get Market Data: You can access historical price and volume data through Kite API. You can also get live market data to track price movements across asset classes like equities, derivatives (F&O), currencies, and commodities.
• Place Orders: Kite Connect API helps you code your own trading strategies, use real-time data to create buy or sell signals, and have them executed directly on Kite through APIs. You can start by setting up your strategy and then let live market data trigger your signals automatically. As your strategies run, the API keeps you updated so you can monitor performance and adjust based on market changes—all in real time.
  

The monthly subscription for Kite Connect API is ₹2,000 per app, with an additional ₹2000 for historical data access. You will need to familiarise yourself with various endpoints available in the Kite Connect API documentation, such as placing orders, retrieving market data, and managing your portfolio.

2. Streak

Zerodha Streak is a user-friendly platform designed for beginner traders/investors, allowing you to create, backtest, and deploy trading strategies without any prior coding knowledge. With Streak, you can:

• Create Trading Strategies: You can create custom trading strategies (primarily on equities only) using technical indicators or scanners and set specific conditions based on market movements. You can also explore certain pre-defined strategies on Streak.
• Backtest Strategies: Streak allows you to backtest equity trading strategies against historical data to evaluate their performance before deploying them in live markets. 
• Deploy Strategies: Once your trading strategy is tested and refined, users can deploy it virtually (paper trading).
  

Streak does not offer automatic order placement services for equities, derivatives (futures/options) or other securities. It provides one-click actionable notifications whenever your set trading conditions are met, allowing you to quickly place orders with ease. When you receive a strategy notification, simply click to open the pre-filled order window, which includes all necessary details such as price and quantity. Just confirm by clicking buy or sell to execute the trade. This additional confirmation step ensures compliance with trading regulations.

Streak is exclusively free for all Zerodha users. You can deploy up to 5 live strategies (including Scanners and Strategies) and up to 15 virtual strategies at a time. Streak allows you to run unlimited backtests on equities and manually added options contracts, while dynamic options contracts are limited to 50 backtests per day.

Be Cautious!

Several third-party algo trading platforms in India integrate with Kite API without Zerodha’s endorsement or oversight. Some of these platforms even claim partnerships with Zerodha without their permission, using its name to promote their products and occasionally making exaggerated promises of guaranteed profits! Zerodha has time and again mentioned that it is actively working to prevent these platforms from misusing its brand and protect customers from being misled. Always do your own research and due diligence before signing up to such third-party platforms for algo trading!

SEBI’s Stand on Algo Trading in India

The Securities and Exchange Board of India (SEBI) has introduced several measures to regulate algo trading, but only for big institutions (brokerage firms, banks, investment firms, etc.). There are no specific laws surrounding algo trading for retail traders in our country. However, SEBI is concerned about the impact of algo trading on market stability, especially due to the increasing popularity of unregulated platforms that promote “off-the-shelf” algorithms with often misleading claims of high returns. Meanwhile, brokers like Zerodha are asked not to associate directly or indirectly with any algo trading platform claiming historical returns for their strategies.

In 2021, SEBI proposed a solution to classify every API-based order as an “algo order”. This would require brokers to get exchange approval for every strategy used through APIs and confirm each order’s connection to the approved strategy—a very complicated and lengthy process. This approach could likely force brokers to stop offering APIs altogether!

In one of his blogs, Zerodha’s co-founder, Nithin Kamath, said they support SEBI’s protective measures. However, the company suggested a different approach: directly regulating algo trading platforms under the RIA (Registered Investment Adviser) or RA (Research Analyst) frameworks.

Conclusion

Algo trading is possible in Zerodha through Kite Connect API and Streak, though with major limitations since it operates within regulatory boundaries that prioritise the protection of market participants. Zerodha’s Kite API is designed for tech-savvy users who seek data access for analysis, manual signal generation, and backtesting. And Streak can be helpful for beginner traders who wish to do algo trading on stocks.

You should always approach algo trading with a clear understanding of the risks and be cautious of platforms that promise easy or guaranteed profits!