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Charts & Analysis

Algorithmic Trading Possible in India?

In a program trading group on LinkedIn, someone asked if Algo trading is viable in India. My answer, suitably explained:

Note: If you aren’t a trader, this will seem like a foreign language to you. I’m not going into detail – that will take me the rest of the year to explain, so excuse the jargon.

One pain point is that STT is between 1.7 and 2.5 basis points (only on sell part) for a two-way transaction. That’s for futures and cash respectively. If you add transaction fees and stamp dity, you end up paying between 2 and 3 basis points per transaction overall. Brokerage – if you are a member this can be zero, but at retail end you might get 1/2 basis point to 2 basis points as additional cost. That means you need 5-6 basis points for a market making transaction, which is high considering most liquid bid-asks are not quite that much.

VWAP algos are easily doable in liquid stocks (Cash market) but then after the top 30 stock, every stock trades less than $5 million (25 cr.) a day. That means you can’t move much volume on VWAP, and you don’t get a deep order book to hit market. VWAP in India mostly means the weighted average of the last 30 min of trading, unlike in the western world – funds want last 30 min VWAP because it’s what the closing price prints.

You can do classic arb algos, like cash/future, basket arb or BSE/NSE. But there is quite a bit of competition here with software from the likes of FT and Greek occupying the classic arb space.

You can also do stat-arb or pairs or such, but pairing is a pain in that you don’t get margin offsets. Still, there are useful mid-freq strategies – not necessarily high frequency – that might work. What’s important is to not get muddled up in the mathematics or see pair correlations where they don’t exist. For instance there is no point pairing an Real Estate company along with an IT exporter, no matter how correlated their prices seem to be. This seems obvious but it really is not; a number of people get confused.

Yesterday, in the US, the Nasdaq was down while the Dow was up 1%.A number of high-freq pair trades must have just died – the pair is well traded, even if the indices are weighted on completely different industries.

Option strategies can be made to work – from traditional triangles to risk or stat based like butterflies, IV arb etc. but these have risk associated with execution (you will almost never get a decent spread on bid-ask). Plus, liquidity is low in non Nifty options, so cash deployable is probably <10cr. Additionally in India, you have the issue of options exercisable in cash, meaning your offset position is naked in case you hold an ITM option that gets exercised at 5 pm (you can do nothing)

Still, things have improved. From tick-bunching to real-time ticks, and co-location, NSE is providing some support. They are also penalizing order-junkies by putting a small cost on order-exec ratio >100 and such.

If you consider “algo” trading as purely something that’s generated by an algorithm with no human input, then yes, algo trading can definitely work. I’m doing quant work in generating trades myself, and I’ve had success in the past (though I choose to execute manually, and have pretty high costs). Quant work can be in technicals – price and volume only – or by adding fundamentals (earnings, news) and finally by mixing in macro (sector, country, allocation, money flows); whatever mix you choose, the algo should be able to say buy X shares in Y company and so on.

A number of people think algo = high frequency trading only. High frequency trading will work best in exchanges like the US ones where they give market makers rebates. India has no rebates, and further transaction charges like STT, so high-freq has a bigger barrier.

This is an interesting field, but as in all fields, timing is important. I don’t know if this is the greatest time to invest in it, but in the long term, quant and algo work will be useful, even if as a worthwhile alternative to discretionary trading.

  • Jacky says:

    Well can you please suggest any links that will help me understand the basics of understanding the post you have made here…Thanks

    I am been working for quite sometime in making Financial planning easy to understand…

  • Soham Das says:

    >[i]High frequency trading will work best in exchanges like the US ones where they give market makers rebates. India has no rebates,[/i]

    BSE is seriously toying with this idea. It was supposed to be "on" by mid-Feb. I dont know if it is.

    STT as always continues to remain a huge pain.

  • Anonymous says:

    >apart from FT and GREEK, you may want to also check and chat up with Anuraag, the owner. I just know you two will hit it off hugely…kazaan

  • Anonymous says:

    >Deepak you mention NSE gives real time tick update but the one we are getting is 1 sec per tick update i am using bloomberg real time feed using b-pipe , can you confirm if i am directly connected to exchange i'll get real time updates with no throttling ? it will be really helpful

  • Anonymous says:

    >There have been talks about abolishing the STT as a component of the DTC that comes into force next year.I'm just keeping my fingers crossed!

  • Anonymous says:

    >Hi deepak i have been your reader for your blog for long time i have done some investments in SIPs which are going fine as of now
    But the problem is i am doing cash future arbitrage for living and was making 20 – 25 % per annum but now with algo trading and very few opportunity
    and hell lot of arbitrager fund i am not able to make more than 6 % this year which is not enough to live on can you guide me how to go about with algo trading and from which broker i can get it
    I have been using edelweiss but there program didnt work properly it was omnesys nest
    And yes STT is the biggest pain of my life as of now please help

  • Anonymous says:

    >Dear Deepak, nice knowledable thoughts regarding the subject.
    As an arb. center is it not neccessary to have such a systems? Day jobbers are dead and arb. now a days are really not meant for retail clients, its only tussle or tug of war between different broking or arb houses. Be in touch we can share a lot regards sudhir

  • Sunny says:

    >Which all brokers provide algo trading to investors?

  • Satya says:

    >SSir, a nice aricle giving valuable inputs about new age trading systems but the last line is very frightening. Time is crucial! 🙂 So whr does it have an edge over traditional ways.

  • Anonymous says:

    >are there any mutual fund like products where your money is invested in algorithmic trading in India?
    If yes what is the minimum investment required?

  • Deepak Shenoy says:

    >Sunny: Not to retail. I think IB does allow some, interactive brokers that is.

    Mutual funds trading algo prodcuts = there was a "quant fund" by what is now Religare MF, don't know how that's done. Reliance also had one.

  • Anonymous says:

    >if one wants to start an algo trading fund what are the regulatory requirements et al..

  • StatSpotting says:

    ” For instance there is no point pairing an Real Estate company along with an IT exporter, no matter how correlated their prices seem to be. ”
    Even if it is Maytas and Satyam? 🙂

  • Ninu says:

    Algo trading is allowed in India but for every strategy NSE approval is required. Plus they are not yet much clear about the retail algo trading platform but as far as i know if a strategy is approved by exchange, retail persons can use it. Software vendors like FT, Symphony Fintech, First Futures etc can be used for algo trading but as far as i know only AmiBroker and Symphony are providing platforms for retail to do algo trading

  • raminder says:

    i think Omnesys is also a gud platform for HFT and NON HFT algo trading…. since it was not mentioned i thought it would help everyone. Apart from Omnesys there are a few names like Flextrader, RTS, chanakya, autotradetech….. but each one having its own pros and cons in terms of price and features. Though for the technical analysts symphony fuse is a wonderful product and we did see it at the ATMA Mumbai Meet in Nov11