Can anyone give me an insight into the basics of Algo Trading?
Algo Trading is basically taking a Trading strategy from a manual execution / concept stage to an automated trading environment. You can think of it as ‘robot trading’. So you are basically building a robot/ bot that will trade based on the rules specified. For e.g. You say buy ‘X’ shares of ‘Y’ Stock @ ‘Z’ price. The rules in an algorithm can range from simple to complex, and can theoretically scale upto infinity. As the rules become more complex, there could be a performance trade-off that will happen
Algo Trading may involve semi-automation – but generally it is preferred to go in for end-to-end automation. So a system will have capabilities for Order Management, Position Management, Money Management, Risk Management. Algo trading can be done for all kinds of strategies that are on different time-frames such as Monthly, weekly, daily, hourly, minute based or even tick-by-tick. Typically, the lower the time-frame the more the incentive to algoise it.
Thank you so much.What about its scope in India?
To answer your question regarding scope in India.
Algorithmic trading in India is still in very primitive stage because of 2 reasons.
1) Very high entry barrier, only affordable to exchange members.
2) Lack of retailer solution as of in western market.
3) Ambiguous stand of exchanges regarding algos.
I will try to elaborate above points here.
1) As of now there are only couple of capable CTCL/OMS providers who can offer APIs for external connectivity. Most others are very primitive type of predefined arbitrage system providers, hence useless for any type of advanced algo system. You can create a flow of your logic but its useless if you can’t connect it to exchange.
International players are coming to India, but their cost is even higher.
2) No Indian broker, as of my limited information provides API access to clients. You either need to have good relations with some broker who understands the risk and has ability/infrastructure to do so. Legal standings on this front is also not very clear. Only Interactive brokers give nice API for retailers. But looking at their transaction cost, I don’t think my 99% strategies wll be profitable with them.
3) Exchange standing on algos is not very clear. As a member of exchange I need to disclose all my algos to exchange as per law. This makes many uncomfortable. Although in my personal experience, NSE’s moral stand is very high and they are very professional.
Hope this answers your questions.
You do not need to disclose the whole algorithm but a small paragraph which give broad overview is sufficient.
Algorithmic Trading and DMA by Barry Johnson is a very good high level introduction to the field.
Thank you all of you I really am enlightened after having read your replies.Please continue to give me insights into the topic as I am new to this field.
People usually use the term “algo trading” for anything involving automation in trading. But actually the ‘real’ term refers to the execution part more than the investing part. In today markets, execution is part of the pre-trade analysis and can’t be ignored but one should make a clear difference between “algorithmic trading” and “quantitative trading”. The latter refers to quant trading strategies like statistical arbitrage, pair-trading, trend following, etc.
So many “algo traders” are actually executing orders using “quant” execution strategies (VWAP, IS, participation, …) to reach the goal the client wants: does he want to be sure he executes all his order at the end of day? does he want to have the better price even though we don’t execute all the order? etc.
A real-world example would be: you have 1 million shares of Vodafone. You want to sell everything by the end of the day. What should you do? Obviously, you can’t send a sell order of 1 million shares to the order book because people will get this public information and they will sell as well thinking you have a private information. If they start selling, the price will go down and you will start selling at a lower price. What you want is to find a strategy that will for example reduce your market impact so that you can sell at the same price at the time you decided to sell or a price very close (or a better price). This is the role of algorithms: to tell you how to execute that order given market conditions, stock specific characteristics, etc.
the book can give you a good overview of the EXECUTION part (ie. algo trading). It is not a high level on the mathematical side (if you are interested in exeuciton models, you better read research paper) but explain very well what algo trading is in the context of an electronic market.
However, if you are interested in the quantitative trading area, this is not the book to read. There isn’t any book that is really good about quantitative trading, and the reason is simple: nobody wants to share a successful trading strategy but some are very common: pair-trading, trend following, market making at high-frequency…. You should search for keywords like SVM, cointegration, time series analysis, …
My 2 cents.
First you need to know trading/strategy before trying to automate it.
Is there any particular site or link where I can go and get information on Algo Trading?
Join a trading company and do manual trading for couple of years then you will slowly understand about market. Then think about algo trading. Until unless you know about market dynamics and some hard core observation, you will just be searching some holy grail on historical data and wasting time. No website or books tells about these things. In this industry every time wheel need to be rediscovered.
So start slowly, keep timeline of 5-7 years and then you will reach a good level.
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