14.7 New experience - algorithmic trading

Hanumant Dhokle

Recently, the Securities and Exchange Board of India (Sebi) has removed the regulatory impediments that prevented securities firms and their clients from directly connecting their computers to the stock exchanges and automating the trading strategies. Automated Systems Trading represents the state of the art in rule based system software. These tools can actually be set in an automatic mode to control trade order entry and execution. The software must be used with an existing trading platform connected to an online broker. It has all the capabilities of advisory software including monitoring and displaying intra-day price and volume while applying algorithms that advise the user of market entry and exit points based on either preset criteria or user specified criteria.

In electronic financial markets, algorithmic trading or automated trading (also known as algo trading, black-box trading or robo trading) is the use of computer programs for entering trading orders with the computer algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention. Algorithmic Trading is widely used by pension funds, mutual funds, and other investor driven institutional traders, to divide large trades into several smaller trades in order to manage market impact, and risk. The automation of trading strategies, termed “algorithmic trading” or “AT”, helps increase the efficiency of a large number of mundane processes of the financial markets. When a security trades at multiple venues, such as NSE vs BSE, or spot vs. futures, there must naturally be a very tight link between prices at these multiple venues. Computers excel at patiently watching for these, making no mistakes in calculations or order placement. Some of the leading players in the world in algorithmic trading are - Citadel Investment Group, Citigroup, Credit Suisse, First Boston, Deutsche Bank, Goldman Sachs, Lehman Bros & Morgan Stanley. India has already evolved a highly computer-intensive stock market. Order placement, order matching, risk management, payment and settlement are now fully computerized. Algorithm-based trading or programme trading is common in developed markets. But so far, AT has not taken off in a big way in India.

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