Their Story. Are you game for algos?

Automated trading, wherein a computer program fires trading orders on your behalf, has been around for some time now. Such trading, also called algo trading, was introduced in India in 2009 and has managed to catch the fancy of large traders since then. The appeal of these trades has grown over the years and these trades currently account for around 40 per cent of the exchange turnover.

While mainly large domestic and foreign institutional investors and brokers trading through their proprietary accounts are actively using algo trading, retail investors are also slowly beginning to dip the toe in these waters.

Algo trading is apt for you if you are not too scared of numbers. Biplab Sinha, an algo trading junkie, leads a company called Tradelab. “Trading is my passion, especially algorithmic trading,” he says. Biplab was exposed to stocks early since his father pursued trading as a hobby. “During my college days, stock markets got my adrenaline pumping and as a computer science student, I started exploring technologies behind stock trading.”

Biplab had seen his father taking too long to exit positions in the hope of making more profit. He would finally end with a loss. “That’s when this idea struck me — set your profit and loss limits and trade without emotions, like a machine. I was very clear about what I wanted to do later in my life. I joined a high frequency trading (HFT) firm right after college and subsequently started my own company, Tradelab, to make advanced trading and algorithmic software for retail traders.”

Sreenivasulu Malkari, an IT graduate from JNTU, is also hooked to algorithmic trading. He was interested in stock markets right from his college days and started trading on a part-time basis initially. But over the last four years, he is full time into trading.

Zero-touch algos, wherein the programs identify the trade and execute it too, without manual intervention, are not yet prevalent among retail traders in Indian markets. Zero-touch algos can be used by retail investors after receiving permission from the exchanges. But the number of rules and regulation imposed by the market regulator, the Securities and Exchange Board of India, is a deterrent. The exchanges where the algo is to be used have to check the algo program and approve it before it is put to use. Getting the approval is cumbersome, keeping out many traders.

There is, however, a via media available for retail investors. Many brokers now offer Application Programming Interfaces (API) that allow them to select the strategy and code their requirements and then communicate it to the broker’s interface.

It’s basically programmed trading where the trader has to manually execute the order or give the signal to the broker’s interface to execute the order. Explaining how this works, Raghu Kumar, Director, Upstox, says, “Suppose I want to do an option strategy where I have to buy a call and a put order. I code my API with the order and click execute and that gets sent to Upstox. Upstox’s interface with the exchange is constantly scanning the market. As soon as an opportunity to buy the contracts at a good level presents itself, it sends a notification to the client’s screen asking if the order can be placed. If the client says ‘yes’ the order gets placed.”

Similarly, algos can be programmed by traders using technical indicators too. “If you want to buy a stock once the 5-day moving average crosses above 1-hour moving average, instead of watching the screen all the time, you can code it in the API,” explains Raghu.

Traders who are full time into trading have the data provided by the broker at their disposal. All they have to do is to use it to program their trades.

However, it’s important to take emotions entirely out of the equation when doing partial algo trading. “Once I got a short signal in BHEL and all the news was supporting my signal. So I decided to go short, but with a distant stop-loss, hoping that it would not get hit. Normally my system has a tight stop-loss but that day I changed that,” says Sreenivasulu. But BHEL moved up 6 per cent in that session, hitting his stop-loss, resulting in a big loss. “That was because of my indiscipline in not following the system,” he rues.

Biplab has an interesting anecdote to share as well. “While trading on the NSE with an arbitrage strategy, I made a small loss. I did not try to find out the root cause of the problem, and put the blame on the market. I learnt my lesson the very next month when I suffered a huge loss with the same strategy. After this incident, I fixed the problem with my strategy, and consequently made windfalls gains in the market.”

“There have been occasions when I did not take an incumbent event that seriously, and missed big opportunities. Events such as surgical strikes, Brexit, demonetisation, are opportunities for algo traders,” adds Biplap.

So what are the strategies that people use more frequently? These could be based on technical or quant analysis or it could be arbitrage-based.

“I like doing arbitrage on low latency data, also referred to as HFT trading in Indian markets,” says Biplap. Mean reversal strategy is another of his favourites.

“My algos are based on price action and traded volumes,” chips in Sreenivasulu.

All fired up about algo trading, given all the action, and wondering where to get some gyan on all this? You can check out websites such as Zerodha Varsity or Trade Academy run by Upstox that have material and conduct webinars to educate traders.

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