Does algo trading make the Indian market more volatile? How to use algo strategies to manage volatility
This helps maintain discipline, which is considered the most important part of any trading strategy. Algo trading helps reduce subjectivity and ensures that decisions are made objectively. Volatility is the nature of the market. It is wrong to assume that Algo is responsible for market volatility. On the contrary, algos are more useful in volatile market situations due to the logic built into the trading strategies.
Market volatility can require a very quick and precise response coupled with the elimination of emotions. Algo can handle multiple transactions in a fraction of a second. Professional trading requires a lot of discipline, dedication and focus. A professional trader should not lose his calm and concentration. Traders must eliminate emotional and psychological factors when making a decision. It’s easier said than done. This type of human error can now be taken care of with the emergence of algo trading.
Algo trading is a mechanism that has predefined computer generated algorithms that are used for trade execution. Effective algorithms require the formation of appropriate strategies, automation, back-testing, and approval by regulatory authorities.
Once the algorithm is ready, it is recommended to run it on pilot projects to check its efficiency and risk management capabilities. It is important to be aware that algorithmic trading may also have certain limitations.
There could be a mechanical failure or an error in the coding strategies. In some cases, human supervision is necessary. In such cases, the person monitoring should have full knowledge of the strategy and how the algorithm will work.
Volatility can be better managed with algorithmic solutions as they allow investors to react quickly to dynamic market situations. Using innovative technology, Algo trading offers faster speed and accuracy in placing orders.
Algo trading removes the emotional aspect of human behavior, making you more disciplined. With a predefined trading approach, you can reduce errors and expect higher returns. In volatile market situations, algorithms help to better discover prices.
Today, 80-85% of trades in developed markets are made using Algo strategies. However, in India, penetration is still at a lower level, at 50-55%. With the passage of time and increased use of Algo, we may be better equipped to deal with market volatility.
Kamlesh Shah is the President of the Association of National Exchanges Members of India (ANMI)