Charting the Course: What’s the Future of Algo Trading in India?

Algorithmic trading (or algo trading) is rapidly gaining popularity worldwide and transforming financial markets. It involves the use of automated, pre-programmed trading instructions and sophisticated computer software to execute lightning-fast trades and profit from patterns in the market. In this article, we explore the evolution of algo trading. We'll offer a comprehensive look at its past, present, and future— and whether it represents the future of trading!

Before we dive into the world of algo trading and its future outlook, it's important to take a step back. Let's first understand the origins of the Indian stock market and see how far it's come!

The Evolution of the Stock Market in India

India's stock markets began during colonial rule when the East India Company first offered shares and bonds. The stock exchanges we see today, like BSE and NSE, came into existence only in the 19th and 20th centuries. Initially, brokers would verbally negotiate prices and shout their offers to place orders on the trading floor. These exchanges would then issue paper share certificates, which were at the risk of being misplaced or lost. Fast forward a few years and brokers could place orders over the telephone.

Eventually, the introduction of Demat accounts in 1996 allowed shares to be traded electronically. This changed the landscape of the Indian stock market by increasing transparency and reducing broker-made errors.

In 2008, the Securities & Exchange Board of India (SEBI) facilitated the implementation of Direct Market Access (DMA). This allowed institutions to go past the broker and directly place orders on the stock exchanges. The lack of a middleman or intermediary completely shifted the market dynamics!

And the next revolution to take the market by storm was algo trading! Algorithms, or computer programs, shape our daily lives, influencing how we think and perform everyday tasks. Algo trading falls under this category and has become a valuable tool for traders. Let’s learn more about it!  

So What is Algo Trading?

Trading has evolved over the past few years owing to rapid advancements in technology and growing competition. Algo trading is a result of this progress. It’s a method of executing orders in the financial markets (stocks, currencies, commodities, derivatives, etc.) using pre-programmed trading instructions. Some of its benefits are:

• Greater speed and efficiency in carrying out the trades.
• Elimination of human errors and misjudgement.
• Algorithms can process large volumes of data and recognise patterns that human traders might overlook. 
• Helps to diversify your portfolio.

Algo Trading: A Journey from Past to Present

If history is known to repeat itself, wouldn’t you rather use past data and patterns to analyse candles than stay anxiously glued to the screen, looking for entry points? This is exactly why algo trading has been gaining popularity. Let’s see how it all began!

Algo trading can be traced back to the 1970s when the New York Stock Exchange (NYSE) used algorithms that consisted of simple rules to govern their trading strategies. This enabled traders to mechanically and seamlessly place orders when prices were favourable. Over time, experts further explored the benefits of algorithms, transforming them into tools that learn from past patterns and analyse markets.

Algo trading entered the Indian market in the late 2000s when High-Frequency Trading (HFT) became possible after the introduction of DMA. By 2010, this form of trading started gaining popularity, mostly among big institutions and High Networth Individuals (HNIs).

The emergence of Application Programming Interface (API) has enabled a more holistic growth in algo trading. An API is a set of protocols and tools that allow software to interact with and place orders on different trading platforms, exchanges, or brokers. Various discount brokers like Zerodha, Upstox, and Angel One offer APIs, which allow individuals like you and me access to the algo trading market.

Also read: What's the History of Algo Trading in India?

Recent Advances in Algo Trading

The advancements in API made algo trading a much more attractive option to retail traders in India. With the market being highly competitive, many started to dabble in algo trading to adapt, implement better strategies, and gain an edge over others. The Covid-19 pandemic was the prime opportunity for this! With access to new technologies and the main element of being at home, traders had the incentive to take on new challenges. 

However, SEBI hasn't set clear regulations for retail algo traders yet. While it is not illegal, the lack of a governing body poses a threat to many. To combat this until firm regulations are in place, many algo trading platforms have sprung up, allowing individual traders to create, test, and deploy algo trading strategies. Tradetron, Utrade Algos, AlgoTest, and QuantMan are examples of such platforms.

Also read: Top 5 Trading Platforms For Beginners in India 

Looking Forward: Future Predictions on Algo Trading

Algo trading is a transformative field with the potential to reshape the entire financial market. India ranks among the top 10 countries globally in technological advancements and AI research funding. With benefits like enhanced decision-making, reduced burden on investors and traders, and early risk identification, it's no wonder that algo trading is gaining attention!

The growing success stories of retail investors in the West, combined with increased interest in financial markets and advancements in artificial intelligence (AI) and machine learning (ML), are major factors fueling the algo trading boom. Innovations such as robo-trading and quant trading represent significant progress, optimising the potential for making profits by placing multiple orders simultaneously— one to capture gains and another to limit losses.

SEBI is also taking steps to make algo trading more accessible. There have been talks of introducing regulations on algo trading for retail traders, which could improve its legitimacy and credibility among Indians.

With such steps and exciting opportunities, algo trading offers a unique approach compared to the traditional methods!

Conclusion

We are rapidly moving toward an automated world where technology plays an integral role in our daily lives. People are constantly seeking ways to take advantage of patterns and trends, minimising the time spent on manual analysis. Algorithms have emerged as powerful tools in this pursuit! 

However, like many tech innovations, algorithms present a paradox: we can't live without them, yet they challenge the irreplaceable value of human judgment. While automation simplifies tasks, the unique insights and intuition of the human mind remain essential. The key to progress lies in finding the right balance between these factors.

Currently, algo trading strategies contribute to nearly 50-55% of the total trading volume in India, according to data from the Association of National Exchanges Members of India (ANMI). However, only about 10% of the retail trading volume is driven by algo trading. With ongoing support from SEBI through evolving regulations, inspiring success stories, and promising results, algo trading is set to gain even more popularity in the coming years. These factors will likely encourage more people to embrace algo trading, further boosting its adoption!