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Share of algo trade touches new high

Algorithmic trading seems to be gaining popularity in Indian equities, as several institutions are embracing technology to initiate orders with a computer programme or simply without human intervention on aspects such as the timing, price, or quantity of the order.

Algorithmic trading seems to be gaining popularity in Indian equities, as several institutions are embracing technology to initiate orders with a computer programme or simply without human intervention on aspects such as the timing, price, or quantity of the order.

According to stock exchange data, algorithmic trading accounted for 8.80% and 16.64% of the total turnover in August on the BSE and the NSE, respectively. Incidentally, according to the information available on the BSE website, the share of algo trade is the highest ever since the historical data is available. The NSE does not have the historical data on its website.

?The trend is catching up. More and more institutions are adopting algo trading as it becomes easier to obtain prices and it is more efficient to initiate orders of huge quantity than placing them with a manual trader,? said an executive at Gurgaon-based firm Estee Advisors.

Further, exchange data also show that trades handled by co-location facilities and smart order routing ? also likely to be high-speed ? accounted for nearly 18.5% and 25, respectively, in August on the BSE and the NSE.

?One probability could be that broad-money or long-only fund could be adjusting their positions that may have resulted in the increase of turnover of algorithmic trades,? said a head of a domestic head that manages algo-based portfolios.

Algos refer to software programmes that execute trades as and when the pre-set defined parameters are triggered. So, for instance, a software code can execute a buy-and-sell order in a few milliseconds when certain price parameters are triggered. Also the volume can be set and the whole transaction executed without manual intervention. Complex trading strategies can also be implemented using algos.

Interestingly, regulators globally have expressed reservations regarding algo trading as they feel it poses risks, such as trading mishaps by way of erroneous algos or even increasing volatility in stock prices.

In May 2010, the Dow Jones Industrial Average plunged nearly 1,000 points ? its biggest one-day decline. Investigations by the US SEC and CFTC revealed that an algo trade was responsible for the flash crash.

The RBI highlighted the risks attached to algorithmic trading in its June 2012 Financial Stability Report.

The report stated that several instances of extreme volatility and disruptions were witnessed in stock markets that could be directly and indirectly attributed to the increased use of algorithmic trading, and it was essential for market regulators and policy makers to continuously assess the system-wide impact of algorithmic trading for a broad-based development of financial markets.

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First published on: 05-10-2012 at 01:21 IST
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