With nearly 50 percent of all trading volumes in Indian stock market and 70 percent in case of leading global market, algorithmic trading, also known as algo trading or high-frequency trading (HFT), has created more than space for itself.
Many retail traders are still unaware that more often than not when they are buying or selling shares the person on the other end of the trade would be a machine.
But does it really matter if an individual is buying or selling his shares to is a robot or a human being?
The answer is both yes and no.
For an investor, it does not really matter who is at the other end of the trade as he would be holding on to his shares for a long period. But for a trader or a scalper, it is important to know if there are bots (short for robots) that are there on the counter in which he is trading. This is because these bots provide liquidity in the counter and enter and exit the trade many times during the day. It is both an advantage to have them as well as a disadvantage in the counter.
Before looking at some of the bigger players in the market we need to get a better understanding of what exactly algo trading is and what are the different type of algo traders to take help of bots to trade in the market.
Algorithm trading is conducted by use of computer program to follow a set of predefined instruction which acts as an entry and exit signals in a trade. Take for instance a simple instruction to buy a stock if it crosses the previous 5 minute high and sell it if the price touches Re 1 higher or exit the position if it falls below Re 1.
Such instructions are given to a computer that takes thousands of trades during the day, a task which is humanly impossible. The other and probably the biggest advantage of algo trading is that it keeps emotions out of trading, something that a normal person finds hard to handle especially after a losing streak.
Other advantages of algo trading are that it can look for similar opportunities in more than one stock or even more than one market. Algo traders get the best possible entry and exits in the trade as there is no lag between witnessing an opportunity and executing it.
There are large institutions that use bots to buy stocks without disturbing the price too much, but these type of trades are for long term and are not closed during the day.
While almost all mechanical strategies that a normal trader uses can be applied for algo trades, the biggest impact of these trading has been felt in the arbitrage trade. Most of the companies using arbitrageurs have shifted human arbitragers with computer programmers. Reports say that one of the leading arbitrageurs in the country replaced nearly 700 traders with two people to manage the computer program.
Implementing an algo trading strategy requires a computer, software and a broker who allows you to run the software. There are very few brokers in India who allow their clients to run software programs. Most of the algo trading in India is done by companies who buy their own trading membership with the stock exchanges. Having brokerage as a cost defeats the purpose of algo trading given the huge volume of trading that takes place. Exchanges in India and abroad, in fact, incentivize such algo traders by waving or reducing exchange related charges and offering other infrastructure facilities.
The big Players
As mentioned earlier most of the top algo trading firms trade in their proprietary book. This gives them two advantages. First is that there are no brokerages in a proprietary book and second is that the company can take advantage of the provisions of the securities transaction tax (STT) which is not possible for an individual client.
While most of us have heard of the big investors and big mutual funds in the market, few have heard of the big hitters in the market on a daily basis. Here is a list of some of the biggest names in the algo trading market, companies that execute millions of trade on any given day and build their fortune by chipping away a few paise from each trade. Many of these companies had built themselves up by replacing human traders with bots.
- Tower Research (Gurgaon)
- Alphagrep Securities
- Goldman Sachs India
- Morgan Stanley India
- iRage Capital
- Estee Advisors
- Acceletrade Technologies
- Dolat Group
The above-given list in not in order of their volume traded.
There are many more companies in India that have taken to algo trading and have expanded in other markets across the globe.
Also Read: Scope for Algorithmic Trading in India?
Just like information technology has revolutionized the way of living and doing business throughout the world, algo trading is changing the way we invest and trade. There are funds now that are being run entirely by computers.
For an individual investor or trader, the competition just got tougher in the market as these computers are as emotionless as a stone. They will keep on repeating their trade till such time that the person handling them decides that it is either not working or there are better programs which will require resources of the company.