Before we discuss about the SEBI guidelines for Algo trade in India, let us first try to understand what is Algo trading. Algorithmic trading is a process of executing a trade using automated computer based program consists of trading instructions. They were developed so that traders do not need to constantly watch a stock and send the order manually. Is’t that exciting? If this excites you then please read below details to understand how it works.
Setting up an Algo system: Setting up a strategy is the most important for any algo trade. The strategy can be developed by an expert trader, who knows technical analysis, understand market very well, can plan market direction based on his/her market study. Once we have a plan or a strategy in place, then that plan need to be converted into an executable program by an expert programmer who knows mathematical models, understands different mathematical functions and their usage. Once the strategy is developed and tested then it becomes a full proof strategy to run in real market.
Pit Falls: Any Algo has its pitfalls, its benefits and drawbacks. Let us first understand the drawbacks. Algo systems are run by computer programs and the Buy and Sell signal gets generated automatically based on the condition mentioned in the program, hence the buy and sell shall always trigger even if the signal is very very small (visually), which might trigger losses during range bound market. The benefit is, there is no human emotion involved in trading, hence the system always hit Stop Loss on time, so our loss is always restricted and limited.
Now a days almost all Brokers have Algo system in their trading terminal, their Trading Mobile App, but not all have Robo trading facility yet. Robo trading is relatively new in India and very few services are available. DTM (Daily Trade Mantra) is one of such Algo based Robo Trading service provider.
There are few points which shall be considered while considering the Software based Trading as Algorithmic trade.
- Any order that is generated by automatic execution logic shall be considered as algorithmic trading.
- The commodity and exchange shall have arrange and infrastructure to accommodate the load on their system to achieve consistence response to all members.
- Exchange system should be upgraded on a regular basis, to maintain the 4 time capacity of the peak order load encountered.
- Market Orders are not allowed to be placed using Algo trade, only Limit orders are allowed
- Algorithms should not fall in any loop in any circumstances
- For Audit purpose member may need to share the Strategy with SEBI
- Prior Approval from Exchange is required by any member before implementing any algorithmic trading
- The Member should have real time monitoring system to identify the algorithms not working as expected
The Approval Process:
- Orders of clients should entered through Member server only, no client order can be placed directly in Exchange
- The Algorithm which will take away liquidity away from the market will not be approved
- Co-location and Co-Hosting will not be allowed
Order to Trade Ratio:
- Up to 50 , NIL, 50 to 250 1 Paise per order, 250 to 500 5 paise per order and more than 500 5 Paise.
- If the Order to Trade ratio is more than 500 during any trading day, then the next trading day the member can not place any order in the first 15 minutes
- All orders related to its Entry, modification and cancellation shall be included as an individual order to calculate Order to Trade ratio
- Any order placed within 1% of the Last Traded Price shall not be considered under Order to Trade Ratio
- Penalty will be applicable on the members who have placed more than 10,000 orders in a day
- No more than 20 order can be placed by any CTCL ID within a second, i.e. within any 5 second, not more than 100 orders can be placed by single member