0 Algorithmic Trading In India: History, Regulations, Platforms

 

 The global algorithmic trading market is predicted to thrive significantly between 2021 and 2025

Introduction

Implementation of trades on stock exchanges based on predefined norms and without any human intervention utilizing computer programs and software is called algorithmic trading or algo trading. While being a subset of algorithmic trading, high-frequency trading implicates purchasing and selling thousands of shares instantly.

While some won't like this procedure but the concord is that algorithmic trading is an unavoidable evolution of the trading procedure, and markets around the globe have executed various measures to give a seamless experience to investors. In the US and other progressive markets, High-Frequency Trading and Algorithmic trading accounts for approximately 79% of equities market share. In India, the data concerning the total turnover has increased up to 69.8%.

Algorithmic Trading in India: Past, Present, and Future

On April 3rd, 2008, the Securities & Exchange Board of India (SEBI), launched algorithmic trading by enabling a Direct Market Access facility to institutional customers. In brief, DMA enables brokers to give their infrastructure to customers and provides them access to the exchange trading system without any intervention from their role. Originally, it was given only to institutional customers and not commercial traders.

However, the facility brought down expenses for the institutional investor as well as enabling them in better execution by cutting down the time spent in routing the order to the broker and handing out the critical instructions.

April 29th, 2008, this facility had already become prominent with some of the top transnational players enrolling for the DMA facility. FI’s & FII’s like UBS, Morgan Stanley, JP Morgan, and DSP Merrill Lynch were the entities awaiting authorization. Edelweiss Capital, India Infoline, and Motilal Oswal Securities were among others who had proposed their request to the Bombay stock exchanges. It is valuable to note that Foreign Institutional Investors (FIIs) were authorized to utilize the DMA facility through investment directors assigned by them, from February 24th, 2009.

 

By July 31st, 2008, Various brokerages along with stock exchanges were gearing up for the opening of Direct Market Access (DMA). Brokerages such as Citi, Merrill Lynch, Morgan Stanley, JP Morgan, Goldman Sachs, CLSA, and Deutsche Equities had begun carrying test runs of their DMA software, in an experiment to synchronize it with the systems at the Bomaby stock exchange.

NSE’s Contribution To The Industry

·         The National Stock Exchange (NSE) began giving additional 54 colocation server 'racks' on lease to broking companies in June 2010 to enhance the rate of trading.

 

·         Deutsche Bank, Citi, Morgan Stanley, Goldman Sachs, and MF Global were among the international broking corporations which used the facility. Motilal Oswal Securities, JM Financial, and Edelweiss Capital were estimated among the well-known domestic corporations who signed up for the racks.

 

·         Local brokerages like Globe Capital, SMC, Global Vision, East India, and iRageCapital had moreover opted for the facility. Not shockingly with a few weeks of giving this facility, there was an extended period of waiting up to 6 months to get a slot on the server racks!

 

·         It was obvious to the Indian exchanges and regulatory bodies that Algorithmic Trading is well- accepted by the institutional customers and banks in the country and its demand would proceed to surge. This was the period when exchanges began enhancing their offerings in the automated trading profession, financial technology firms started giving automated trading platforms and SEBI proceeded to regulate the markets.

 

 

Modifications to the Brokerage Industry

·         Broker commissions had begun shrinking as an outcome of an increasing volume of institutional customers heating the Direct Market Access (DMA) idea. To keep up with the times, they began giving automated software to the customers.

 

·         The new entrants to this domain are discount brokers who are part-time brokers who give facilities at extremely low brokerage expenses. They can do this by giving only minimal facilities, unlike full-service brokers who usually give assistance as well as training programs for their customers.

 

Legislation In Indian Stocks Markets

·         Every year SEBI comes up with legislation to be pursued by traders and brokers to maintain the trading industry stable and risk-controlled. To read about SEBI’s recent testimony regarding the algorithmic trading industry in India, go to the official website of SEBI.

 

·         Risk management is essential with algorithmic trading. That is why, for any algorithm to be authorized by the markets, exchanges need a firm to undergo a series of authoritarian tests if it plans to trade through algo trading. These tests comprise the number of orders that would be placed per second, the utmost order value of any order placed, and the peak traded quantity during a specific trading day.

 

·       Supervised share trading practices and brokers  service

·         It is suggested that exchanges should alter the pricing hierarchy of their co-location renting to make it available to small and medium-sized brokers and traders as the current process of renting the whole server rack to one anti increased expenditure.

 

·      Latency measurement

·         To give greater transparency when it comes to recording the latency for co-location and proximity hosting, it has been recommended that the exchanges should give the least and maximum as well as the median latencies along with the latencies at 50th and 99th percentile.

 

·      Tick-by-tick data feed

·         SEBI has recommended giving tick-by-tick data feed free to the members, traders, and brokers of the exchanges.

·    Special  identifiers for algorithms

·         SEBI has advised that all algorithmic orders reaching their platform should be tagged with the special identifier which is allocated when the distinct algorithm is submitted for authorization.

Future Of Algorithmic Trading In India 2021

·         With various amendments over the years, India gives a nice opportunity for algorithmic trading due to various components such as co-location facilities and detailed technology at both the primary leading stock exchanges; a creative order routing system; and stock exchanges that are well organized and liquid.

 

·         Given the promptly thriving trends and demand of HFT and Algorithmic Trading in expanding economies & developing markets, there have been policies by several exchanges to nurture their members and improve the skill sets which is expected for this technology-driven domain.

 

·         With several trading platforms and tools usable in the market, each professing to be better than the other, an individual who is testing the water in the field of Algo trading may be confused and mystified by choices. Thus, we have collected a list of some of the most prominent platforms and algo trading that are being utilized in the market today (precisely for Indian equity markets), to level the playing field and provide a detailed picture to the users.

 

·         To keep up with the globalizing world,  you must keep yourself abreast with the latest skills and techniques that will facilitate to you pave your success path in Algo Trading and you have to be in the Fastlane for that - like many share traders who encountered massive success by using  Algorithmic Trading software.

 

 

Algorithmic Trading Platforms

·   Onesies NEST

·         It is an exclusive algorithmic trading platform that is competent in executing various strategies like basket trading, order slicing, 2L and 3L spreading. The platform is relatively adaptable in its operation and empowers share brokers to trade across numerous asset classes like Equities, Derivatives, Currency, and Commodities. Although it is relatively significant in terms of its tools, it is largely catering to institutional brokers and therefore, is not utilized by commercial traders.

 

·       Presto ATS

·         Formulated by Symphony Fintech, Presto ATS is an adaptable algorithmic trading platform for automated trading in India in approximately all asset classes.

 

·    Presto ATS can be utilized in 3 modes

·      Live training

·      Paper training

·     Backtesting

 

·      ODIN

·         A flagship software by Financial Technologies (now 63 moons), ODIN is a “multi-exchange, multi-segment front-office trading and risk analysis system”, which demonstrates  Order Management System (OMS), risk management, as well as third party API integration.

 

 

·      FlexTrade

·         Flex Trade Systems generates order management and implementation management systems for almost pretty much everything, encompassing foreign exchange, futures options, and equities.

 

·         Established in 1996, it is recognized for launching Flex TRADER which is supposed to be the first broker-neutral system that lends the customers comprehensive confidentiality when it comes to creating and customizing their algorithmic trading strategies.

 

 

·         ergonomics

·         A subsidiary of NSE, NSEIT built AlgoNomics: an algorithmic trading platform that caters to institutional customers, investment banks as well as individual traders. The ergonomics platform claims to give low latency to users as they develop numerous trading strategies. As it is with the other trading platforms explained so far, ALgoNomics also gives support for all market classes, incorporating Market  Equity, Equity Derivatives, and Currency Derivatives.

 

·      AmiBroker

·         While AmiBroker is not an algorithmic trading platform in the genuine sense of the word, we have listed it here due to its strategy towards automating trading methods utilizing AFL. While you do get a technological analysis and charting software so that you can backtest as well as implement a strategy in real-time, it moreover enables you to code a trading strategy in English. To accomplish this, AmiBroker developed the AmiBroker Formula Language (AFL) code wizard wherein you can push and pull English words to clarify how a strategy would operate and AFL converts into a code that can be utilized for implementation on the AmiBroker platform.

 

 

How to Begin your Algorithmic Trading Journey In 2021

1) Financial knowledge

Attaining an in-depth knowledge of the financial market/instrument to come up with a belief on which you can establish your trades. You need to have acquired some knowledge-based horizon in any market in which you love to win over the rest of the opponents and participants.

2) Coding your strategy

For this point, understanding an open-source language like Python or R comes in relatively useful. Translate your strategy in a set of practical statements and make full usage of extraordinary free libraries usable for both these languages.

3) Parameter optimization

The natural outcome of backtesting and validating is that it will either lead you to wholly omit your hypothesis (90% of the time or more!!) or that you have managed to drag actionable signals from the pool of data you began with. You can then optimize your strategy parameters keeping in mind that your strategy should function well on out-of-sample data as well to avert overfitting/data snooping prejudice.

4) Selecting the right broker and platform

It is very significant to do a thorough analysis on this beforehand, as your overall endeavors should make business sense after all the overhead expenditures are taken into account. Make sure you only spend on the features you utilize to execute your strategy effectively. In short, keep the trading expenses low & operations flexible.

 

5) Keep learning and augmenting new skills for 2021

As many brokerage firms say that,  -" the best investment is investing in yourself". Look to bolster and revamp both your domain proficiency and technological skills needed to act on that knowledge/information. For instance, pick up a book by the likes of Warren Buffet / Bill gates or do an online course to strengthen your coding skills.

Conclusion

The beginning of algorithmic trading has amended the rules of conventional broking in India. With substantial volumes on the exchanges now being traded with the assistance of refined algorithms, traders must be fully conscious of the trading platforms and algo trading that would facilitate them to execute their strategies and remain robust.

Although India was not a fast-mover into the domain of Algo trading, its vogue has been on the surge ever since SEBI authorized the usage of advanced technology to be commemorated by the equity markets. This has also built a necessity for algo trading software, tools, and platforms, which are being accessed by traders to execute the financial trading on the stock exchange more flexibly.