Algorithimic trading, famously known as algo trading — a web-based integrated trading platform that uses big-data analytics and offers robo-insights to institutional investors — may soon be available for retail investors too.
Reliance Securities, a few months ago, had launched an algo-based platform called Tick.
Only for the elite
Angel Broking has a similar platform named ARQ, and Kotak Securities, KEAT ProX. Many other broking houses have similar platforms or are fast getting into this space for retail investors.
Algo trading and high-frequency trading (HFT) were, till recently, beyond the reach of small retail investors due to the high cost factor.
Algo trading, in simple words is a step-by-step instruction for trading actions taken by computers (automated systems), says IOSCO, and (HFT) is a subset of algorithmic trading – using speed and reduced latency.
Although automated routes are quite sparingly used by retail investors at present, the future is expected to see a rise in such advisors, given the aggressive expansion plans of broking houses. Currently, this facility is being used only by high net worth clients or foreign portfolio investors, due to the cost barrier.
According to the NSE, algo trading constitutes 14.84 per cent of the total trading while trading through co-location servers, which are very close to the NSE and offers faster movement of data and execution of trades, account for 24.15 per cent. On the BSE, according to October data, about 5.5 per cent of the total trading has happened through algo and 27.19 per cent via co-location.
Myths
Those who fancy algo and HFT trading should note that there are several myths surrounding this mode of trading doing the rounds in India.
Some traders feel that algo trading will reduce your emotions and thus will play a major role in success, especially in the case of day trading.
So, will automated trading check your emotions?
Day traders would do well to understand that it is a zero-sum game, which means your gain is somebody else’s loss and vice-versa. So, if you are making money today, there is every chance you would lose the same another day to another algo-trader or to an ordinary trader.
However, if you are a long-term investor, it is immaterial whether you buy stocks or any other assets through robo or algo pick or by normal procedure. At best, it could give you a few extra percentage points of return.
Another myth is that it will prevent you from indulging in excess trading (over-trade). When volatility increases in the market, traders tend to get tempted to over-trade. The result could be a huge loss. With or without algo, day traders are hardly equipped to handle pressure. On the contrary, there is also the possibility of algo advice luring traders to undertake greater volume of trading, which could lead to bigger losses. It is next to impossible for a day trader to be emotionless, unless you are a Buddha or a Mahavira.
For day traders algo/robo should be a facilitator to do a transactions. It cannot be a discipline maker. Discipline in trading should be self-imposed.