The pervasive nature of technology has disrupted many industries and transformed how we live, work, and invest. In the Indian financial markets, one of the most prominent examples of this transformation is the rise of algo trading. Powered by sophisticated algorithms and low-cost computing power, algo trading has become the newest buzzword with its ability to analyse vast amounts of data in real-time and make investment decisions based on pre-defined criteria. Although algo trading is not a new concept, its refinement and accessibility have been recent developments. In 2008, the Securities and Exchange Board of India (SEBI) issued a circular allowing Direct Market Access (DMA), which initially permitted non-retail clients to use algo trading through their brokers’ infrastructure. Gradually, SEBI extended this privilege to retail investors while addressing concerns and regulatory considerations.
There is a growing consensus that algo trading will democratise financial markets, granting retail investors similar opportunities as larger institutions. This is made possible by algo trading platforms that seamlessly integrate human intelligence with technology. One of the significant advantages of algo trading is its ability to eliminate human biases and emotions from investment decision-making. Emotions like fear and greed often influence financial decisions, as witnessed during our many small and large-scale economic crises. Algo trading circumvents these biases by relying on sophisticated algorithms, enabling even inexperienced traders to profit from the market.
Moreover, algo trading empowers retail traders to analyse market data, identify patterns, and execute trades at unprecedented speeds. This access to technology and information, once exclusive to institutional investors, enables retail traders to make informed investment decisions and capitalise on previously inaccessible opportunities. Additionally, algo trading reduces the likelihood of errors in data input or parameters, especially when sudden opportunities arise. Algo trading has also significantly reduced the cost barrier for retail traders. Previously, high-tech infrastructure and trading systems were quite expensive for individual investors. However, recent technological advancements have made algo trading accessible to a wider audience. This shall enable retail investors to get an institutional grade tech platform, with milliseconds of latency, efficient automation and best possible execution.
Beyond accessibility, algo trading has enhanced market transparency and liquidity, benefitting retail traders. The use of algorithms increases trading volumes and narrows bid-ask spreads, facilitating easier execution of trades at favourable prices. This improved liquidity fosters a more efficient market environment, ensuring that retail traders can participate without being disadvantaged by institutional investors. Algo trading is still in its nascent stages of transforming the financial market landscape, and as more retail investors embrace it, we can expect a level playing field. With further advancements in technology, the democratisation facilitated by algo trading will continue to strengthen, empowering individuals to compete and potentially achieve higher returns in the ever-evolving financial markets.
(Kunal Nandwani is CEO and Co-founder of uTrade Solutions. Views expressed are author’s own.)