The concept of algo trading emerged in India way back in 2008. In the western world, where the approach was first used nearly three decades ago, algos were holding nearly 50% of US equity trading capacities by 2012. In the domain of foreign exchange, which operates nearly 23 hours a day, algorithms contain almost 80% of the trading volumes.
In simple words, algorithmic trading makes the use of high-end technology to enable automatic buying and selling of stocks. This type of trading is done on the basis of an analysis of companies, industries, sectors, prices and other information, and determines when to buy or sell. But a computer can also read this data on its own, and if you have an appropriate algorithm, you could use a computer to place orders quickly and effectively.
What is Algo Trading?
Algorithmic trading is defined as a way of executing buy and sell orders given the preset trading guidelines related to price, time and trading volume. It is also known as black box trading. After the current market conditions go well with any preset condition, trading algorithms can perform a buy or sell order on the behalf of an investor. This results in huge time savings that goes into reading the markets, faster trader execution at any point of time.
In the stock market, it is the timing of the decision that determines the success or failure of a trade. This is where algo trading comes into play by allowing traders to take an advantage with the help of technology by determining profitable opportunities before a human does. For huge institutional investors who choose deals in large quantities, this type of trading is of great use.
Reasons to use Algorithmic Trading
- Lesser chances of human error – The use of technology omits the intrusion of human emotions that tend to affect the eventual decision. Algo trading enables automated trading which emits the chances of human mistakes.
- Better opportunity – One can choose from a range of algorithms given his specific strategy, and optimize the exposure to emerging opportunities in the stock market.
- Complement an existing strategy – It is possible to utilize these algorithms to redefine risk management in your trading approach, executing stops and restrictions on one’s behalf.
- Low maintenance – No need for human intervention as you just need to set up algorithms and let them trade around given your timings, 24 hours, any time.
- Backtest – Backtest and improve your algorithms in regard to historical data, to set up the best blend of parameters for buying or selling
Leading Algo Trading Platforms or Application
Below is a list of all popular algo trading platforms and applications in India:
- 5Paisa Algo Trading Platform
- Prabhudas Lilladher Algo Trading Platform
- Alice Blue Algo Trading Platform
- Reliance Tick Algo Trading Platform
- Arihant Capital Algo Trading Platform
- SMC Global Algo Trading Platform
- Fox Trader Algo Trading Platform
- Zerodha Algoz Algo Trading Platform
- Mastertrust Algo Trading Platform
- Zerodha Streak Algo Trading Platform
- Nirmal Bang Algo Trading Platform
Popular Algo Trading Platforms in the world
Besides, below are the ones that are popular all over the world:
Presto ATS – Developed by Symphony fintech, Presto ATS is one of the most widely used and multipurpose algo trading platforms in the world. It is thought to be a wonderful platform for automated stock trading in India and is perfect for all asset categories.
Omnesys NEST – Omnesys NEST is considered among the most widely preferred trading platforms being used in India. The platform is developed by a Bangalore-based tech firm, Omnesys Technologies Pvt. Ltd.
The term NEST stands for Next Generation Electronic Securities Trading platform. It features a wide variety of trading tools. The best part is that these tools can be customized for institutional and retail stockbrokers, exclusive desks and stock exchanges.
AlgoNomics – Prepared by NSEIT, AlgoNomics is essentially a black box trading platform that has been purposefully developed to offer detailed monitoring with low latency execution and management features.
FLEXTRADE – FlexTrade Systems Inc., is the global industrial in broker-neutral, execution and order management trading platforms across equities, options, foreign exchange, futures and steady income. It is greatly considered unique in the industry for its superb performance and multi-asset competence.
ODIN – Conceptualized and developed by Financial Technologies, ODIN is largely considered a multi-category, multi-exchange trading and risk management platform. It boasts of some awesome features like order management, risk management, and third-party API integration.
Benefits of using Algo Trading or Black Box Trading Platforms
There are numerous benefits of using algo trading or black box trading like:
- Markets and Instruments – There are different types of algo trading software systems available in the market that feature a number of instruments and sectors to enable an extensive range of trading approaches.
- Broker and Market Data Connectors – One can choose to access a varied range of market and broker information easily and quickly.
- Strategy Preparation – By using algo trading, one can get exposed to various valuable features that help him develop and test different types of quantitative trading strategies in any market across shares, commodities, future, forex, bonds, and cryptocurrencies
- User Interface and Reports-One can get various personalized management and reporting services in algo trading to match his trading objectives.
- Order Management and Execution Algos – Algo trading platforms feature a high level of flexibility in regard to order management. This helps traders in the execution of any trade in any market. One can make a variety of order types and algorithms currently available.
- Improved Availability and Presentation – Algo trading is found to be a very sturdy and dependable system as it is based on a memory competent, multi-dimensional and extremely simultaneous architecture. That leads to superb performance and obtainability.
- Commercial Functions and Automation – Algo trading is extremely complex and completely automated which helps traders save almost an hour of manual human labor.
Popular Algo Trading Strategies
There are majorly three algorithmic trading strategies:
- Price Action Strategy
A price action algorithmic trading strategy considers preceding open and close or high and below points on a candlestick chart, and instigates a buy or sell order if parallel levels were attained in the future. For example, one can choose to create an algorithm to execute buy or sell orders if the price goes above point A, or if the price drops below point B. This is a widely used algorithm among scalpers who wish to generate a string of rapid but small profits over the day on extremely volatile scenarios – a process called high-frequency trading (HFT).
To instigate a price action trading algorithm, one is meant to determine whether and when he want to go short or long. He will also need to take into account various measures to help things like the prevailing risk, sprawling and certain stops – and restrictions.
- Technical analysis strategy
A technical analysis algo trading strategy is related to technical pointers including stochastic oscillators, Bollinger bands, MACD, the comparative strength index and lots others. Using this strategy, one can develop an algorithm that would run on the parameters across various indicators, such as position closing during high volatility. Apart from this, one can also build indicators himself on platforms including ProRealTime.
To prepare a technical analysis strategy, one is supposed to do extreme research and be easy in using various technical indicators. In case of a technical analysis strategy, you’re less concentrated on price and more inclined towards employing pointers or a mix of indicators to activate your buy and sell orders.
- Combination Strategy
A combination algorithmic trading strategy makes the use of both price action, and technical examination, to verify suspicious price action by examining charts along with indicators. Algorithms can subsequently execute buy or sell orders given the obtained information.
In the case of a combination strategy, one is supposed to determine whether he wants to go short or long and time of the trade execution of the algorithm. One can come up with a combination strategy as per the prevailing condition of the market, the time edge, the trade scale and various indicators that are used to design the algorithm.
What are the main features of Algo Trading?
The main features of algo trading are:
- Markets and Instruments
- Broker and Market Data Adapters
- User Interface and Reports
- Order Management and Execution Algos
- Strategy Preparation
- Commercial Activities and Automations.
- Improved Availability and Results
What kind of analysis is possible with algo trading?
The three types of analysis that can be done using this type of trading are trading knowhow, quantitative analysis, and programming skills.
What are the things that carry an impact on algo trading?
The various factors that carry an influence on algo trading are distance, internet bandwidth, speed, strategy, and colocation.
What is latency?
Latency refers to the time taken by one before losing out when he sends out an order. Essentially, it is the time taken by the order to arrive at the trading terminus or exchange or the time taken to practice market information, order steering and much more.