How Algo-Trading Software Is Powering Stock Market Trading In India? Know In Detail

By connecting with a broker or exchange, algo-trading software enables the automatic successful implementation of trades based on the occurrence of predetermined criteria, indicators, and movements

The the algo-trading software helps users save time, make wiser choices, and investigate opportunities in a constantly expanding market.

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Today, technology has influenced several aspects of our economy, and the capital markets are no exception. Solutions such as dematerialisation, digital payments, online banking, and more have changed the way we invest and trade today. As the market is getting flooded with new strategies, techniques, and methods of trading, the use of programming and data engineering is also increasingly gaining significance. Algorithmic trading methods have been recognised by financial institutions, HNIs, and even retail enthusiasts. The main advantage of this type of trading is the ability to execute market trades at precise timing and speed, which is impossible to achieve manually.

When algorithmic trading first came to India in 2008, it was known to very few people, or more accurately, only financial institutions. It was seen as the purview of professionals who understood the intricacies of the market. As a result, it remained largely out of reach for beginners, depriving them of knowledge and market information. However, today, the times have changed, and investors from each segment are now easily able to access algo-trading software, which is changing their trading experience. A NIFM report states that client-side algo trades account for about 50 per cent or more of all orders at both the BSE and NSE. Over 40 per cent of all orders placed at both exchanges are prop side algo trades. At both exchanges, colocation generates over 80 per cent of the algo orders.

Algo-trading software: A revolutionary tool to enhance trading experience

Numerous people in India have begun creating new algorithms as a result of the rising popularity of algorithmic trading. Additionally, a variety of algo trading software are readily available today and can aid traders in developing their skills. Algorithmic trading software primarily automates the trading of financial instruments like stocks, bonds, digital assets, currency, and more. By connecting with a broker or exchange, it also enables the automatic successful implementation of trades based on the occurrence of predetermined criteria, indicators, and movements. Additionally, the software may offer a wide range of benefits.

Saves time: The time-saving benefit of using algo trading software is one of its most compelling advantages. The software enables faster trade executions for the traders since quick decision-making and opportunity identification are urgent needs. This advantage gives them an edge over those traders who execute manual trading.

Accurate decision-making: The main flaw in manual trading is that it is affected by human emotions. Without emotional interference, the algorithmic trading software uses algorithmic configurations to carry out its functionalities and make wise decisions. This lessens their hesitation and enables traders to stick to their trading plans.

Prevents overtrading: Over 90 per cent of traders lose their money in the stock markets and one of the reasons is overtrading. Decisions in the highly risky and volatile market environment are frequently motivated by a variety of emotions, such as excessive trading out of concern for potential losses or placing orders quickly in an effort to maximise profits. Since all decisions are supported by the thorough market analysis in the software, trading discipline is upheld while adhering to the appropriate trading plan.

Provides backtesting facilities: The stock market relies on both data and sentiment, and backtesting can handle the data component. Backtesting enables the use of historical market data to test trading rules and strategies programmed into algorithmic software. It enables the correct evaluation of the trading decisions and leaves no room for constant interpretation.

Overall, the algo-trading software helps users save time, make wiser choices, and investigate opportunities in a constantly expanding market. However, the question arises: are all algorithm software the same? The answer is no, as the software is created on the basis of requirements. But, in a holistic manner, we can divide the software into two basic types: pre-programmed strategies and adaptive strategies. Pre-programmed strategies are rules that are pre-fed into the algorithm and used in the software without any change or modification. Contrarily, algorithms used in adaptive strategies modify their inputs in response to shifting market conditions. Therefore, before selecting the appropriate platform, the trader must first understand their needs. However, an algo trading software may need to have some common functions available to extract maximum benefits.

Selecting the right algorithm software

You must check the following features before selecting an algo trading software:

Availability of market data: The first thing to notice is the real-time price quotes and market data that must be available in the algo trading software. Additionally, the software must have information, including fundamental and technical data, about the companies you are attempting to trade. It ought to be built into the system or have a feature that makes it simple to integrate data from different sources.

Low latency: The most crucial element in algorithmic trading is latency. It is the time delay that is added when moving data points between applications. In today's volatile trading environment, where the initial price quote changes multiple times within seconds, latency is an important factor to consider when choosing software. The algorithmic trading endeavor could succeed or fail based on this delay. Therefore, it is recommended to select software with the lowest latency.

Customizable and rewritable programs: The trading software should be highly customizable and configurable, whether it is purchased or created. Additionally, any software provided by third-party vendors must allow for the creation of customized programs. This allows a trader to experiment with and test any trading idea. It makes sense to prefer software that allows you to code in the programming language of your choice.

Backtesting function: Backtesting, as previously discussed, is an important feature that can aid in determining the strength of a strategy. Therefore, the functionality of the algo trading software must also comply with this requirement, along with the availability of historical data for backtesting.

All things considered

Algorithmic trading can help you optimize your trades, but it is also subject to market risks. As a result, prior to engaging in algorithmic trading, you should have knowledge of trading software and experience trading stocks using technical analysis tools. To become a professional trader, you also need a lot of perseverance, patience, market research experience, algorithm coding experience, and resilience. Additionally, using good software to help you with this process can be useful.

The author is the founder at FinDoc.

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