Careers: How to benefit from the rise of algorithmic trading
Algo trading is an automated facility where trading is carried out by computer driven algorithms designed by traders.
Goel, an IIT Delhi Computer Science graduate, who prefers not to reveal his first name, set up an algorithmic, or algo, trading consultancy two years ago. Today, he trades on a host of exchanges, managing around Rs 20 crore worth of funds. "My daily turnover has sometimes touched Rs 1,300 crore," he says.
Algo trading is an automated facility where trading is carried out by computer driven algorithms designed by traders. Instead of the traders manually doing so, it is these algorithms that determine which orders - to buy or to sell - get booked. The high speed - transactions can take as little as 18 microseconds - at which such trading takes place, gives it a competitive advantage over conventional manual trading. While a single trader can manually handle at best a portfolio of around Rs 5 crore, an algo trader, working alone, can cope with Rs 50 crore to Rs 55 crore.
Algo trading started in India in 2005. But it was only in 2008, after the Securities and Exchange Board of India (SEBI) allowed Direct Market Access, or electronic interaction with the order books of exchanges, that this facility started gaining wide acceptance. Today, around 16 to 17 per cent of trading on the Bombay Stock Exchange (BSE) and National Stock Exchange is algorithmic, with about 80 to 90 companies engaged in it. But many believe that in the next three to four years, the proportion could rise to 60 to 70 per cent.
Algo trading calls for two kinds of skills: strategy or domain knowledge, and code development. Domain knowledge means knowing stock trends in different sectors thoroughly, while code development requires a strong command of programming languages. Indeed, a background in coding is in high demand. "Our team has to consist of people who are inclined towards coding, so as to make programmes according to the whims and fancies of clients," says Sudhir Dhar, Associate Director and Head of Human Resources at Motilal Oswal Financial Services.
The Indian Institute for Quantitative Finance (IIQF) offers six month and one year certificate and diploma courses in algo trading. Many trading consultancies have recently begun their own training programmes. "We have a six-month certificate course costing Rs 60,000. So far 500 candidates have enrolled," says Vipin Kumar, head of India operations of financial technology solutions provider Modrika. The firm began the course after it found, on opening its office in India a year and a half ago, that there were few people with expertise in the field.
However, algo trading has also raised worries. It is being closely examined by both SEBI and the Reserve Bank of India for allegedly causing disruptions in the market as well as bias in favour of large institutional investors. Last year, all trades during Mahurat trading on Diwali, October 26, were cancelled by the BSE, following unexpected volatility which was blamed on algorithmic trading.
Some also question the expertise of algo traders. "Today there are a lot of people with only computer science knowledge getting into this field," says Professor Abhijit Biswas, Director, IIQF, Mumbai. "They can do some serious damage. Regulators need to come up with stringent norms for a proper certifying process for algorithmic trading, like the trade association of mutual funds (AMFI) has done for mutual funds."
Algo trading is an automated facility where trading is carried out by computer driven algorithms designed by traders. Instead of the traders manually doing so, it is these algorithms that determine which orders - to buy or to sell - get booked. The high speed - transactions can take as little as 18 microseconds - at which such trading takes place, gives it a competitive advantage over conventional manual trading. While a single trader can manually handle at best a portfolio of around Rs 5 crore, an algo trader, working alone, can cope with Rs 50 crore to Rs 55 crore.
Algo trading started in India in 2005. But it was only in 2008, after the Securities and Exchange Board of India (SEBI) allowed Direct Market Access, or electronic interaction with the order books of exchanges, that this facility started gaining wide acceptance. Today, around 16 to 17 per cent of trading on the Bombay Stock Exchange (BSE) and National Stock Exchange is algorithmic, with about 80 to 90 companies engaged in it. But many believe that in the next three to four years, the proportion could rise to 60 to 70 per cent.
| STATE-OF-THE-ART Algo trading uses computer driven algorithms to decide which stocks to buy and sell Offers Opportunities for Candidates with Engineering and Computer Science backgrounds Professionals Start at Rs 15-20lakh per annum Rosy Future Algorithmic trading could account for 60-70% of trading in equity markets in next 3-4 yrs Source: BT Research |
The Indian Institute for Quantitative Finance (IIQF) offers six month and one year certificate and diploma courses in algo trading. Many trading consultancies have recently begun their own training programmes. "We have a six-month certificate course costing Rs 60,000. So far 500 candidates have enrolled," says Vipin Kumar, head of India operations of financial technology solutions provider Modrika. The firm began the course after it found, on opening its office in India a year and a half ago, that there were few people with expertise in the field.
However, algo trading has also raised worries. It is being closely examined by both SEBI and the Reserve Bank of India for allegedly causing disruptions in the market as well as bias in favour of large institutional investors. Last year, all trades during Mahurat trading on Diwali, October 26, were cancelled by the BSE, following unexpected volatility which was blamed on algorithmic trading.
Some also question the expertise of algo traders. "Today there are a lot of people with only computer science knowledge getting into this field," says Professor Abhijit Biswas, Director, IIQF, Mumbai. "They can do some serious damage. Regulators need to come up with stringent norms for a proper certifying process for algorithmic trading, like the trade association of mutual funds (AMFI) has done for mutual funds."
