A decade ago, the Securities & Exchange Board of India (SEBI) allowed stockbrokers to offer Direct Market Access (DMA) to their institutional clients.
This was the advent of Algorithmic Trading (AT) in India. Because it happened bang in the middle of a global recession, the introduction of DMA swept the entire banking and the securities market.
Now, programs running on computers could place trades and manage portfolios efficiently, with minimal manual supervision.
What’s more, these trading algorithms could generate profits at a speed and at a frequency that was impossible for a human trader to reach.
Ever since exchanges have been making more and more changes to accommodate automated trading. Brokers' servers were 'co-located', i.e., placed inside the exchange premises.
This reduced travelling time of the signals being sent by the algos. The market data now came tick-by-tick only for the scrips that clients had subscribed for.
Prop traders were granted memberships at much lower prices to bolster high-frequency trading (HFT) shops. Algorithms could place orders at the preferred exchange via Smart Order Routing (SOR).
With the recent Clearing Corporation inter-operability norms, the need for SOR algorithms is higher than ever before.
Even the brokerage industry has effectively warmed up to these changes. They came up with easily comprehensible automated software – and provided interfaces (APIs) – that could place orders for traders.
Since the current platforms have access to historical, as well as live market data, one can back-test their trading algorithms easily. So, it's no surprise that of all the trades that happen at NSE today, more than 46 percent are placed by trading algorithms!
The global algorithmic trading market is expected to grow significantly between 2018 and 2026. And that’s because cloud-based services for algorithmic trading will start to emerge in the markets.
Then, there’s the demand for AI. It helps algorithms learn from their past experiences, adapt to the market conditions, and hence reduce the risk while making their next trading decision.
Sounds cool, doesn’t it?! It’s why 37 percent of the financial institutions in India invested in such technologies last year, and 68 percent of them plan to hop onto the same bandwagon soon, according to a survey conducted by Coherent Market Insights.Combine that with the trend of managers opting to use algorithms that can trade in the non-equity segment, and how India’s rural per capita disposable income is estimated to increase to $631 by 2020. Well, we’re only starting to look at the big picture.
The future of trading and dealing is in automation. Traders will be expected to at least have a basic understanding of how these algorithms work.
On the other hand, manual trading, with its taxing dependence on emotions, will stop leaving footprints in the sands of finance. How long, do you wonder, will it be, before you jump onto that ship? There are so many reasons to!
The author is Founder, Arque.Tech. He can be contacted at email@example.com Disclaimer
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