As an alternative to manual trading, an investor can now write an algorithm that involves providing specific pre-defined trade instructions or programs to the computer to automatically execute particular trading.
Typically, algorithmic trading involves the gathering of historical information and data based on which execution of trading takes place.
For example, if a trader wishes to purchase 500 shares of a blue-chip corporate house when it touches Rs 1,000 and sell these shares when the stock price hits Rs 1,250, they can key in these instructions by writing an algorithm. The trade will be executed automatically once the stock price hits the mark.
This way, apart from stock price as a metric, a trader has the option for numerous other instructions like moving averages, volumes, etc.
One of the key benefits involves a reduction in human errors while executing time-saving trades.
The stock market can be highly volatile, algorithmic trading ensures that trades are timed correctly while being mindful of dramatic price fluctuations.
In India, the market volume figures from algorithmic trading are anywhere between 40-50 per cent.
Certain institutional investors and retail traders are known to deploy algorithmic trading to make considerable purchases of stocks. Better liquidity in stock markets can be expected through algorithmic trading.
Earlier in September, the Securities and Exchange Board of India (Sebi) had issued guidelines for stock brokers providing algorithmic trading asking them to not mention any reference to past or future returns. The move comes after it was ascertained that specific stock brokers provided algorithmic trading services to investors through unregulated platforms.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.