Algorithmic trading is done by using very advanced mathematical models for making transaction decisions to trade in stocks. The strict rules/Strategies are built into the model/code which attempts to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock’s price. Bulk orders of shares are usually purchased by dividing the large share block into smaller lots/QTY and allowing the complex algorithms to decide when the smaller blocks are to be purchased.
In India, Basically it’s allowed to trade using algorithmic for institutional entities, HNI’s. An individual also can do trading using algorithmic codes, To get access to this feature he should first clear the NISM series VIII Equity Derivatives Module to have a dealer terminal, then he has to get registered has an AUTHORISED PERSON with the EXCHANGE (NSE/BSE,). Once his application for AP is approved he has to submit the strategies/coding to respective exchange for verification & to get approve of the same from exchange. After all the necessary Approvals the applicant can use Algorithmic/ Mathematical codes for his trading. NOTE:- MCX don’t have this facility to trade in Commodities as of now.
Algorithmic trading involves the use of algorithms in pre-built platforms to place electronic trades on stocks, futures, options, currencies and commodities on exchanges, with no human intervention.
The algorithms are pre-programmed and make use of information in the market — such as market prices and quantities — to generate buy and sell signals.
Therefore, since no human intervention is involved, algorithmic trades are usually faster and more efficient than manual trades placed by traders.
In 2008, India allowed the first Direct-Market-Access (DMA) and algorithmic trades to go through. Since then, algorithmic trading has taken off and now constitutes a sizeable percentage of all trading activity on the National Stock Exchange (NSE) and the BSE.
Algorithmic Trading is a process to Buy or Sell a security based on some pre-defined set of rules which are backtested on Historical data. These rules can be based on Technical Analysis, charts, indicators or even Stock fundamentals. For example, suppose you have a trading plan that you would Buy a particular stock if it closes in Red for 5 consecutive days. You can formulate this rule into Algorithmic Trading system and even automate it so that Buy order is placed automatically when your condition is met. You may even define your stoploss, target and position sizing in the algorithm which would make your Trading life easier.
Check out the below link which would help you to develop your own Algorithmic Trading System:
If you want to do Algo Trading, you should ideally have a strategy that you want to trade on its own, a strategy that will give buy & sell signals which can be then sent to the exchanges without any human intervention. We keep getting queries on people wanting to automate; do note that without a strategy, you cannot really automate anything.
Where do I get a strategy?
Automation is advisable only for someone who is an experienced and professional trader, so if you don’t have a strategy it is best not to try something out just for the heck of it. You should also take care that if there is a strategy, it is backtested and that you know of all the possible consequences.
Where do I program this strategy and backtest it?
There are many off-the-shelf products available that let you code and backtest strategies, like AmiBroker, NinjaTrader, MetaStock, eSignal and others. There are also many who build custom interfaces to code/backtest strategies. To backtest a strategy, you will need market data which will have to be subscribed to through a data vendor.
Minimum requirements
Exchanges in India have many stringent rules for retail individuals to automate strategies.
Need to be registered as an Authorized Person on the exchanges. The one time cost of registering is Rs. 3000/segment/exchange. So if someone wants to register for NSE – Equity, F&O, and Currency, that will be a one time cost of Rs 9000 ( Rs 3000 + 3000 + 3000). For MCX it will be an additional Rs 3000.
Once registered, you would need a dealer terminal from Zerodha to automate as it is not allowed on a retail trading terminal. A dealer terminal does exactly what a retail terminal does, but gets some admin rights which are required for automation. The monthly rental cost for a dealer terminal is Rs 250/segment/exchange, so if you want NSE – Equity, F&O, and Currency, that would mean Rs 750/month (Rs 250+250+250). For MCX it will be an additional Rs 250/month.
To get a NSE/BSE dealer terminal, the person operating the terminal needs to have cleared the NISM Series VIII Certification. There is no such requirement in case of MCX.
The above process can take anywhere between 2 to 4 months’ time.
Strategy & Front end Approval
Firstly, you will need to decide which platform you will be using to automate the strategy, an off-the-shelf product like AmiBroker.
Costs & Process
Every strategy will first need to be audited by a CA. This will cost around Rs 2500/strategy.
The strategy has to now be tested on the exchange UAT (User Acceptance Testing) site and by participating in the mock trading sessions conducted by the exchange. There would be a rental charge of Rs 2500/month charged on a pro-rata basis for using the UAT.
The demo is now given to the exchange and once approved, you can automate the strategy. The entire process can take up to 1 month.
Cost of automation if you are using AmiBroker is Rs 6,000/month and no one time cost.
Cost of automation if you are using a custom front end is Rs 12,000/month and a one-time cost of Rs 30,000.
As you can clearly see, the costs are pretty restrictive to automate trading strategies for retail individuals, and there are so many hurdles for individual traders to trade using algorithms.