Algo Trading Is Convenient, But Watch Out For Risks


Algo trading may be able to help you if you want to trade stocks but are unable to do so due to work or other obligations, but only if you use a reliable platform. In a recent circular, the Securities Exchange Board of India (Sebi) urged investors to exercise caution while dealing with unregulated algorithmic trading solutions provided by some businesses.

The use of algorithms in trading is growing. In 2018, algorithmic trading accounted for 50% of all customer orders on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), according to a study released by the National Institute of Financial Management.

What Algo Trading Offers

Speed and automation:
Individual investors can analyse trade-related data factors, but it would take time and resources. Trading on the stock market takes place from 9.15 am to 3.30 pm. Usually, at this time, individuals are occupied with work. Algorithms lessen the work and enable those who lack the time to invest in trading.

One of the biggest benefits of algo trading is that all computations and analysis may be completed in a matter of seconds, allowing for substantially faster trade execution. Using algorithms also helps investors avoid making emotional decisions.

It is possible to use several algorithms based on pricing, volume, timing, or other strategies. The algo code automatically executes the deal or shows the required action (buy/sell) when the conditions are satisfied "explained Mohit Nigam, director of Hem Securities' portfolio management services.

Arbitrage Opportunity:
Algo trading can assist investors in taking advantage of short-term market arbitrage chances. To give an example, Trivedi says, "Let's say the current market price of a stock is Rs 99 on NSE and Rs 101 at BSE. Assuming brokerage of 5 paise on each trade and assumi ng that an investor has money to invest and holds the stock, she can buy the stock on NSE and sell on BSE at the same time (through algo trading), resulting in risk-free profit.

Optimising Your Trading Technique:
Optimising Your Trading Technique: Not every stock market trading strategy will be effective in every circumstance. Machine learning and artificial intelligence require training an algorithm to optimise the trading strategy using enormous historical market and other data sets, according to Vivek Sharma, director (strategy) and head of investments at Gulaq, a division of Estee Advisors. We can't rely on one set of algos to function in all market scenarios since markets are always changing. According to fresh data, AI aids in optimising and updating our algos, says Sharma.

Prior to using their methods in the real world, traders can back-test and run them several times in the live market with the use of algorithms.

Things To Keep In Mind

Trading with algorithms has a price.
You still have to pay brokerage for each trade even if an algorithm is trading on your behalf. There is also a platform charge.

The algos may regularly modify their approach, just as the market does every second. According to Trivedi, this may increase the effect cost of the trade (brokerage, etc.), as the cost of each trade increases with the number of transactions.

While algo trading could aid in automating trade research, it might not have any impact on the timing of the trade execution itself, which is a crucial element. Retail investors are not permitted to execute automated trades under Sebi laws. "The risks of investing in a market must be understood by investors (volality). Investors will not be sufficiently informed about these risks by an AI-based algo platform. Consequently, it might have long-term detrimental effects on a small investment "said Sethuratnam Ravi, founder and managing partner of the chartered accounting company Ravi Rajan & Co. LLP.

Numerous unregulated algo trading platforms are available in the market. Investors should research, analyse, and learn about regulated algo trading platforms in order to select the one that is ideal for them rather than falling for deceptive advertising.

"The majority of algo trading platforms are entirely unregulated, and investors have little redress in the event that the algo providers missell products, make mistakes, or otherwise manipulate the market. We wholeheartedly welcome Sebi's efforts to integrate these platforms into a legal framework, adds Sharma.

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