Is algo trading making the Indian market more volatile? How to use algo strategies to handle volatility

It helps maintain discipline, which is considered to be the most important part of any trading strategy. Algo trading helps to 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 volatility in the market. On the contrary, algos are more useful in volatile market situations because of inbuilt logic in trading strategies.

Volatility in the market may call for a very quick and accurate response coupled with eliminating emotions. Algo can handle multiple trades in a fraction of a second. Professional trading requires a lot of discipline, dedication and focus. A professional trader must not lose his calm and concentration. Traders need to eliminate emotional and psychological factors while decision making. It is easier said than done. This kind of human error now can be taken care of with the emergence of algo trading.

Algo trading is a mechanism which has predefined computer-generated algorithms that are used for trade execution. Efficient algorithms require the formation of suitable strategies, automation, back testing and approval by regulatory authorities.

Once the algorithm is ready it is recommended that it should run on pilot projects to verify its efficiency and risk management capabilities. It is important to be aware that algorithmic trading can also have certain limitations.

There could be mechanical failure or error in coding strategies. In some cases human monitoring is required. In such cases the person who is monitoring has to have full knowledge of the strategy and the manner in which the algorithm will work.

Volatility can be handled better with algorithmic solutions as it enables investors to respond quickly to dynamic market situations. With innovative technology, Algo trading provides faster speed and accuracy in placing orders.

Algo trading removes the emotional aspect of human behaviour, which makes you more disciplined. With a predefined trading approach, you can reduce errors and expect higher returns. In volatile market situations, algorithms help better price discovery.

Today 80-85% of trades in developed markets are achieved using Algo strategies. However, in India, penetration is still at a lower level, at 50 to 55%. With the passage of time and increased use of Algo, We could be better equipped to handle the volatility of the market.

Kamlesh Shah is the President of Association of National Exchanges Members of India (ANMI)