Retail investors venture into algorithmic trading
Sanket Gajjar, 30, an engineer with Larsen and Toubro Ltd in Baroda, has been a stock market investor for the past seven years. However, over the past four months, he is using a trading technique, hitherto restricted to institutions and high net worth individuals—algorithmic trading.
Algo trading is using computer programmes that follow a set of rules based on timing, price, quantity, etc., to execute trades automatically.
High-frequency trading (HFT), a subset of algorithmic trading, where trading firms primarily compete on speed to profit from arbitrage opportunities, now accounts for at least 40% of trades in the equity cash segment, according to data. It is mostly restricted to institutions.
Now, as a market boom is pulling retail investors into equities, one class among them is venturing into areas like algo trading. Over the past four months, firms such as 5Paisa, a unit of IIFL Ltd, Zerodha Ltd, Master Trust Ltd, SMC Global Securities and Upstox (formerly RKSV Securities Ltd) too have started offering algo-trading facilities to retail clients.
“I started investing through algo-trading about 3-4 months back. Only 5Paisa offers clients to trade with their algo-trading logic. My trades are chosen on the basis of VWAP (volume weighted average price),” said Gajjar.
“Initially my daily algo trade turnover was around ₹5-10 lakh. Now I participate in 85-90% of the trading sessions, my daily average turnover is around ₹50 lakh.”
He warned that while rewards are handsome, there are significant risks too.
Retail investors like Gajjar are entering this spaces even as India’s financial regulators are struggling to frame norms for automated trading to create a level-playing field in the market between regular traders and sophisticated algorithm-based high frequency trading (HFT) users.
In August last year, the Securities and Exchange Board of India (Sebi) proposed seven new ways to level the playing field including allowing a split second delay once an order has been place, matching orders under a batch system, introducing random delays in order execution and so on.
However, it met with resistance from algo users who said it would impact liquidity and increase cost of trading.
While firms like 5Paisa and Master Trust allow clients to use their algo-trading strategies, other brokerages allow retail clients to select from the algo-trading schemes that are pre-programmed by the brokerage itself.
“To open an algo-trading account, one has to deposit ₹25,000 as one-time fee and an annual service charge of ₹25,000. We will give the trading terminal and the API (Application Programming Interface)... It is difficult to put a number, but 200-300 customers should be using our platform over the next one year,” said Prakarsh Gagdani, CEO, 5Paisa Capital.
“It is evident that transactions in the financial services space are gradually moving towards digital modes. In Japan and the US, retail investors had already started algo-trading long back. In India too, customers have started understanding the basic concepts of automated trades and this trend is clearly going to pick up. We too are planning to launch algo facilities for retail customers in the next 6-9 months,” said Sammeer Saurabbh, chief technology officer at HDFC Securities Ltd.