Algorithmic Trading:
The Securities and Exchange Board of India (SEBI) recently announced a settlement scheme for stockbrokers currently under regulatory scrutiny for collaborating with unregulated algorithmic (algo) trading platforms.
- Algorithmic trading (also called automated trading, black-box trading, or algo-trading) uses a computer program that follows a defined set of instructions (an algorithm) to place a trade.
- It combines computer programming and financial markets to execute trades at precise moments.
- The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader.
- The defined sets of instructions are based on timing, price, quantity, or any mathematical model.
- Algo trading is already prevalent in India among both institutional and retail investors.
- Apart from profit opportunities for the trader, algo-trading renders markets more liquid and trading more systematic by ruling out the impact of human emotions on trading activities.
- Algorithmic trading relies on historical data and mathematical models to predict future market movements.
- However, unforeseen market disruptions, known as black swan events, can occur, which can result in losses for algorithmic traders.
