The Future of Algo Trading in India and its Evolution Over the Years  

You may or may not be familiar with the working of Algo Trading, but if you trade frequently you may have come across the term or something like Automated Trading or Algorithmic Trading and you possibly know what is it (for those unfamiliar with Algo Trading, refer to this blog about Algo Trading and it’s Benefits).

Many People wonder is Algo trading just a phase or is it an actual serious business? Those who want to incorporate trading through a comfortable medium must have wondered is it secure enough to start Algo Trading now. What if the buzz fades? What if the phase passes and you have nothing left for the future that you invested your money in. 

So please be with me this whole time while we go through some facts about the evolution of Algo Trading over the years in India and the very possible future of it.

Well before I tell you what the future is going to be like, first let's just see how the situation was in the past when algo trading started to what it is today to get a better context of future position or expectation. Since, trading is all about numbers and time (mostly), we can see the growth in the past to the present to the future in statistical estimates and get a solid grasp of the situation.

As of 2019, the share of Algo Trading or Algorithmic Trading and High-Frequency Trading in the US and other developed country's market is about 70-75% of their equity market share. While, in India it is becoming more famous with about 49.8% increase in percentage with respect to the total turnover.

When it all Started

On 3rd April 2008, SEBI introduced the Algorithmic Trading to Indian Trading community and allowed Direct Market Access (DMA) facility to institutional clients. That meant brokers then provided their clients with access to trading facilities without intervening from their side. With the facility only provided to institutional investors in the initial days.

By April 29th 2008, it had already become familiar among global players and they started switching to DMA facility. In July 2008, many leading brokers started testing their DMA software to synchronize them to the system at stock exchanges.

By February 24th 2009, Foreign Institutional Investors (FIIs) were approved to utilize the DMA facility with Investment managers nominated by them.

And in May 2010, NSE enabled Financial Information Exchange (FIX) on its trading system and it boosted transaction speed for foreign investors using DMA.

The Current Position

In India, in the year 2010 the percentage of Algo Trading with respect to the total turnover was 9.26% (average). By March of 2018, it changed into 44.8% of the cash market volume and 48.2% of the equity derivatives market (courtesy NSE data). While 37.22% of the trade on BSE took place through algo trading.

In March 2018, around 46.5% of volume of the total trade across the cash and derivatives market was through Algo Trading that included DMA and co-location. And the remaining trade was performed through smart order routing, internet and smart phones and remaining non-algorithmic methods.

According to a National Institute of Financial Management (NIFM) report, around 50% plus of total orders at both NSE and BSE are algo trades -client side. Prop side algo trades are 40% plus of total orders placed at both the exchanges. 80% plus orders are generated from colo at BSE (of total algo orders).

What will be the future?

Some big changes happened in the market along with the rapid changes in the algorithms and technology in the past. And in the future these changes in people's approach and innovations in technology are going to be even more rapid than now. Trading in Future is going to be all about the calculations and algorithms, the full potential of which is yet to be utilized.

There will be more innovations in the AI arena boosting the algorithms and making trade placing more logical with analyzing past performance, current position and news going around and then adapting to what is the best logical practice.

Industry reports and several estimates suggest that at the global level, share of algo trading in the markets is going to grow from $11.1 billion in 2019 to $18.8 billion by 2024. The share of algorithmic trading in the future market is going to grow at a rapid rate till 2026 because cloud-based services for algorithmic trading are going to emerge in the future.

Calculations could be modified into the chips straightforwardly for expanded proficiency and simpler correspondence. Global regulations could come into the foray and make algo trading more globally organized.

According to a survey conducted by Coherent Market Insights, around 37% of financial institutions in India have invested in algo trading and artificial intelligence related technologies. And remaining are planning to join them soon.

With several changes over the years and more to come, India has a vast scope to grow in the arena of algorithmic trading with many factors already contributing to the trend such as colocation facilities and sophisticated technology at both the major exchanges and a smart order routing system.

Thank You for keeping up with me till now. Hope it was helpful to you.

If you find it informative, do share it with others.

You can visit our website o contact us for more information on Smart Algo - Algo trading software.