Retail investors betting big on algorithmic trading

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Mumbai: 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 essentially using computer programmes that follow a defined 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. However, 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 fourth 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 for 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 Rs5-10 lakh. Now I participate in 85-90% of the trading sessions, my daily average turnover is around Rs50 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 in order 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 trading users who said it would impact liquidity and increase cost of trading.

While companies such as 5Paisa and Master Trust allow clients to use their own algo trading strategies, other brokerages allow retail clients to select from the algo trading schemes that are pre-programmed by the brokerage itself.

“In order to open an algo trading account, one has to just deposit Rs25,000 as one-time fee and an annual service charge of Rs25,000. We will provide the trading terminal and the API (Application Programming Interface). Most of our retail clients are tech-savvy. As of now we have around 25 customers on our retail algo trading platform who put together generate around Rs15-20 crore turnover. It is difficult to put a number, but I think 200-300 customers should be using our platform over the next one year which would be a good number to start with,” said Prakarsh Gagdani, chief executive officer at 5Paisa Capital.

While discount broking firms have already begun pushing their algo trading schemes to retail investors, full-service brokerage firms too are planning to join the bandwagon in the next few months.

“It is evident that transactions in the financial services space are gradually moving towards digital modes. In Japan and the US, retail investors have 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.

However, some market experts feel that even if retail investors get to use some algo trading facilities they won’t be able to gain as much as the institutional clients who have been using HFT.

“The algo strategy used by retail customers is typically of high-latency, based on programmed logic with a limited scope for certain stocks or derivatives. But since these retail investors still cannot have their broking terminals in the proximity of stock exchanges, they will not get the latency advantage that the traditional HFT users get from co-location facilities (essentially having one’s trading server on the same premise as the exchange’s) given to brokers by stock exchanges for very high fees. This is why institutional clients will continue to have an upper hand in algo trading,” said Kunal Nandwani, founder and CEO, uTrade Solutions Pvt. Ltd.