Before we elaborate on this topic, it is more than necessary to understand the basics of algorithmic trading. This information would help you in understanding more advanced trading concepts at a later stage. So, let’s start.
When it comes to trading in stock markets, investors usually rely on stock traders who put their money in stocks using their intellect and following market trends. One thing that is important to note that it is quite difficult for a human to decode the complexity of the stock markets and the decisions are taken by a stock trader might not be worth all the time. This is where Algo trading comes into play which is also referred as automatic trading or computer-based trading.
What is Algo Trading?
Algo-trading refers to the use of preset programs to perform trades. A group of instructions or an algorithm is inserted into a computer program and it automatically executes the trade when the conditions are met. The algorithm can be based on a number of input elements such as price, timing, quantity or other metrics.
In this type of stock trading, the role of technology is paramount. MCX Algo trading is known to offer a number of benefits such as high speed, precision, and lack of human intervention. All the trading related tasks are performed by the computer itself and there is no need for the traders to search for favorable opportunities to trade. In recent times, the craze for Algo trading has increased which also signifies that it holds the future of stock trading.
Benefits of Algo Trading
Now when it comes to choosing the best segment for Algo trading, the commodity sector comes out as a great choice. This is because commodities markets boast of high liquidity and thus, perfect for Algo trading.
Over the past few years, the use of MCX Algo trading has increased sharply and it was the year 2015 when also trading exhibited a quick uptrend in the commodities markets.
MCX Algo Trading Facility (ATF)
MCX Algo Trading is complemented by algorithmic trading facilities. It encompasses the automatic generation of the buy/sell orders by the algorithms on the computer systems, the entry of the orders into the Exchange’s trading system, and the matching of the orders by the Exchange’s trading system.
The members of MCX have the choice to either buy the MCX approved Algo Trading Facility (ATF) software from Exchange impaneled vendors or they can have their in-house Algo trading facility after taking permission from MCX. There is a particular list of the exchange verified vendors for the gaining of the ATF.
The members who prefer to pick their strategies or to develop their own software need to furnish certain documents to be approved by MCX. These documents include software confirmation, network design, strategy write-up, details of the software development team, etc. and they also need to pay one-time charges of ₹1,50,000 and annual charges of ₹50,000.
MCX has laid down a set of guidelines and rules and regulations that need to be followed for MCX Algo Trading.
Regulatory issues related to MCX Algo Trading
MCX Algo Trading can have an influence on market volatility due to the high volume of orders. Therefore, Algo trading needs to be monitored by SEBI and other market regulators to ensure that it does not have an adverse effect on MCX.
There are several rules that need to be followed for MCX Algo Trading to ensure that there is properly trading in the market and there is a fair application of the trading platform for all the members of the exchange.
Initially, the use of any algorithm or strategy needs to be sanctioned by the Exchange, along with any changes made in the future. The Algo orders need to be classified as being automated by the use of a flag so that they can be eminent from the manual orders. Also, only limit orders are permissible to be placed.
Market orders and immediate or cancel an order are not permitted to be placed while doing MCX Algo Trading.
SEBI also needs the members to keep a timely check on their software while MCX Algo Trading. It is to ensure that the software does not begin broken which may lead to the inundating of the market with orders. Also, a precise daily order-to-trade ratio is specified along with the charges for it.
Over time, SEBI has also respected the role and efficiency of Algo trading and it has soothed some of its regulations to promote MCX Algo Trading.
Above all, MCX Algo Trading accounts for a large percentage of the total trades. It is carried with a good amount of efficiency and participation and MCX has put in place stringent rules and regulations to ensure that the market prices and the volatility do not get inappropriately and negatively influenced by Algo trading.
There have been some cases of order flooding by Algo trading software in MCX, but the regulators have maintained them proficiently.