Algorithmic trading (also called automated trading, black-box trading, or algo-trading) uses a computer program that follows a defined set of instructions (an algorithm) to place a trade. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader.
The defined sets of instructions are based on timing, price, quantity,sudden activity in stock and lakhs of other parameters and mathematical model. Apart from profit opportunities for the trader, algo-trading renders markets more liquid and trading more systematic by ruling out the impact of human emotions on trading activities.
Benefits of Algorithmic Trading
Algo-trading provides the following benefits:
- Trades are executed at the best possible prices.
- Trade order placement is instant and accurate (there is a high chance of execution at the desired levels).
- Trades are timed correctly and instantly to avoid significant price changes.
- Reduced transaction costs.
- Simultaneous automated checks on multiple market conditions.
- Reduced risk of manual errors when placing trades.
- Algo-trading can be backtested using available historical and real-time data to see if it is a viable trading strategy.
- Reduced the possibility of mistakes by human traders based on emotional and psychological factors.
In US, about 70% of overall trading volume is generated through algorithmic trading. The overall trading volume of algorithmic trading estimated in emerging economies like India is roughly 40%.
Algorithmic trading is legal in India and nearly 40% of the trades in the Indian equity markets are driven by automated algorithms. In India , if you are a retail investor you will have to a lot of work in order to automate your algorithm as exchanges in India don't allow retail individuals to automate strategies
Till now Algo trading is done by Corporate, Foreign Institutional Investors & Large Trades who had funds to invest in Algo Software and have knowledge of the market and different strategies. Retail investors are still not able to enjoy benefits offered by Algo Trading due to high cost of Algo software and lack of knowledge about thousands of different strategies to use and millions of mathematical models to apply. To overcome these problems and help investors to take benefit of Algo trading we have Suite of Intelligent Advisory Portfolio called ACE which are based on Algo trading mechanism, where in retail investors can invest a lump sum amount or via monthly contributions known as SIPs. Investors need not worry about purchasing an algo software or learning different strategies and mathematical models. They just have to choose the theme in which they wish to invest like Large Cap, Mid Cap, Small Cap, Multi Cap depending upon their risk appetite.