On May 6, the Sensex slumped a huge 2 per cent and much of the fall on that particular day was attributed to Algo traders who sold through Algorithmic trading platforms.
There is no definite statistic on how much of Algorithmic share trades in India constitute total trades. Individuals believe it is just 30 per cent as compared to 70 per cent in the US. The share of these kind of trades is ever increasing and individuals want more of such programmed driven trades. It's best to always understand what it actually is.
What is this Algorithmic share trading in the Indian context?
You can sell shares in a number of ways and depending on a number of factors. For example, you can sell 5000 shares of Reliance at 10.00 am, 11.00 am and 12.00 pm. You can also sell Reliance in a batch depending on the arbitrage available, the profit that you want and maybe even the cost of slicing it in a a batch of orders.
Now, let's say a trader wants to sell a stock when it reaches its 30 day average levels. The order can be programmed to sell the stock at that level, instead of the order being monitored constantly by the trader.
So, algorithmic trading can take care of all of these complex trading strategies including the arbitrage that one can get from different markets, the timing, the size and the amount of profits and loss.
The National Stock Exchange (NSE) has a set of compliance that you can undergo if you want to undertake complex transactions through the algorithmic route. The Bombay Stock Exchange also provides algorithmic trading for investors. There are undertaking that one needs to comply for meeting the requirements of both the exchanges.
For trading in algorithmic trading platforms on NSE one has to provide an algo trading undertaking through the ENIT.
They will also need get a letter from the vendor for the strategies they want to apply for, in case of approved algorithms. The scanned copy of vendor confirmation of respective strategies has to be submitted by the member while applying for the strategy approval in ENIT
Apart from compliance Algo trading also requires a large amount of capital that is needed to begin trading.
Speed is of essence in these types of trades, which is also why they are called high frequency trading.
According to the guidelines from the Securities and Exchange Board of India (SEBI) the minimum capital that ones requires is a sum of Rs 50 lakhs for engaging through these platforms. There are various guidelines that one needs to comply with before it is allowed. One can get information from the Bombay Stock Exchange and the National Stock Exchange.
To conclude you need solid systems, solid strategies and a good amount of capital if you want to begin algo trading for shares in India.