Algorithmic or Algo trading is computer generated trading based on the algorithms fed in the trading system. These are generally used by financial institutions and PE to trade. Majority of trading in US is done through this in US and India is also moving in the same direction. Firms spend a lot of money in developing there proprietary algorithm in the hope to generate positive returns.
Just to give you an example of a trading Algorithm, we can code to look for any stock which is above 50 DMA, whose marker cap is more than 1000 Cr. and Willams %R (technical indicator) is below -20. Once you set up this trading system, it will scan all stock say every 5 minutes and will buy/sell the stock once the condition is met. This is just a very simple example of the algo trading. Some of proprietary algorithms can be of tens of thousands of lines of code and will look at say 100 condition before doing a trade.
But it is not like small day traders cannot utilize Algo trading to make their trades. One of the best things if you switch to Algo trading is that you don’t have to worry about the emotions while trading. Algo will trade only when all the condition you have written are fulfilled.
Common Used Strategy for Algo Trading
One of the most basic and used strategy is Arbitrage. Just to explain it in a little more details, say stock of Reliance is trading at 998.5 at NSE and 999.7 at BSE. Say your transaction cost is Rs. 1 so there is an arbitrage opportunity of .20 paise. Manual doing these trades is difficult but these can be very easily done by using Algo trading. Similar method can be used to trade between futures and cash market and take advantage of any arbitrage opportunity if it exist.
The other common algo trading strategies in Indian markets are trend following and market making.
Stock Broker providing Algo trading in India
1. Angel Broking – Symphony (www.angelbroking.com)
2. Zerodha- Pi (http://www.zerodha.com/)
3. Mastertrust- Omnesys (http://mastertrust.co.in)
There are basically two companies which are providing this services in India one is Omensys and the other is Symphony. Lately many brokers like Zerodha have come up with there own trading platform in which algo trading is possible. For example Zerodha also provide you option to write you own algo and can even backtest to see how profitable that strategy would be. For detailed review of Zerodha, please have look at Zerodha Review.
If you seriously want to do algo trading, you have to get real time data feed for stock market. This is generally pretty expensive. A better idea would be first to create your alrorithm and back test it on old data which you can get for free. Once you have refinend your algo and you are confident that it should be able to generate positive system, you can purchase the live data feed. Also to use it professionally make sure that you have backtested it well because once it is on live system, it would start generating trade based on the Algo you have written.
I know that this article doesn’t provide you all the info you will need but I hoped that it helped you in understanding what is algo trading. This field is still open and brokers are trying to test the water. SEBI also keeps on coming up with new regulation on Algo trading which brokers have to follow. So, this is a field which will still take some time to mature but I would advice you to open broking account with brokers who are trying to provide this to the masses. To read more about the broker, do see our list here.