Benefits of Algo Trading for Retail Investors, Institutions

The benefits of algo trading exist for everyone; including the layman investor, a professional  trader or a financial institution.

  • Yes, algo trading makes life easier for even the layman investor. For absolute basic examples, please refer previous article. We have already shown that algo trading makes life a lot easier for everyone.
  • It is essential for professional traders to fetch the best available prices by a sound execution logic.
  • For fund houses and financial institutions it is inevitable because they run complex strategies and trade in large quantities.


The Benefits of Algo Trading:

Save Time

A good ATS Execution Strategy saves time spent in sending manually orders- punching and modifying. Similarly, a ATS signal generation strategy saves valuable time spent in analyzing a stock. Therefore, by saving time in repetitive tasks though ATS, a trader can focus on managing strategies. Having an ATS is like hiring an assistant for repetitive tasks.

Save Money

For active traders, an ATS can save lakhs of rupees spent in slippage. Reducing the trading costs is considered most important benefits of algo trading. Let us explain it with an example:

  • Assume you decide to buy Nifty Futures based on momentum and look at its order book. The Best Buyer|Best Seller are at 8520.20|8520.50
  • To manually punch order, you press F1, fill limit at 8520.50, click on Send and then click on Confirm.
    By the time the limit order goes to exchange, prices move further up- 8520.50|8520.70. Your order is now pending in exchange as Best Buyer
  • Since it is momentum based trade, Nifty does not fill your order and moves further upto 8520.80|8521.00
    Realizing that your pending order has minimal chances of getting filled, you frantically move on. Go to pending orders window, Cancel pending order, Press F1, fill limit price at 8521.00, click on Send and then click on Confirm.
  • By the time the limit order goes to exchange, prices move further up- 8521.20|8521.50. Your order is once again pending in exchange as Best Buyer.
    You frantically repeat the process of cancelling pending order and sending fresh buy order at 8522.00 and get filled.

In such manual trading, you first decided to buy when Best Seller was at 8520.50 but actually bought at 8522.00. This difference of Rs 1.50 is called as slippage. However, if you had a very fast computer (server) on your side to automatically send orders, you could have bought near 8520.50, say 8520.60. Thus the ATS can save Rs. 1.40 per trade per lot. For a intraday trader who makes two trades daily with 3 lots of Nifty, it will amount to monthly saving of Rs. 1.40 *50* 3*2*22= Rs. 9240!!

Minimize Emotions

Emotions tend to be the biggest enemy of a trader. When a trader’s intelligence is disturbed by impulsive mind, he may risk too much on a strategy or abandon a strategy without proper performance measurement.
Since ATS executes pre-defined trading logic, no human emotions are involved. This is considered the second most important benefits of algo trading.

Inculcate Discipline

Discipline once developed can be maintained even when markets are highly volatile or when prices are stagnant for days. An ATS forces a trader to think systematically by executing trades on well-defined trading logic. It minimizes emotional impulses.

Intellectual Engagement

This is perhaps the best advantage of ATS. Since ATS forces systematic trading, it pushes the traders to continuously research for better strategies. It engages there intellect to the fullest by calculating risks, costs along with the rewards of each strategy. Hence it improves the productivity of a trader as person.

Minimize Human Errors

Every active trader loses money to menial errors like punching wrong order quantity, wrong order price or sending the order in wrong scrip. ATS minimizes such errors.

Reduce Gambling Tendency

Indians love to gamble a lot- which cricket team will win match or which politician will win elections. By intellectual engagement ATS also limits gambling tendency.

Diversify Trading

Having ATS as assistant saves time to allow you diversifying in more scrips, multiple strategies and multiple segments

Complex Strategies

Execute complex strategies which include auto-modifcation, multi-leg, multi-client, multi-scrip and multi-exchange execution. Therefore, for institutional trading and fund managers, ATS is unavoidable.

How much does benefits of algo trading costs?

Impressed by the benefits of algo trading? Let’s look at its costs. The simplest form of algo trading- a bracket order is provided free by many brokers. The cost of deploying an ATS depends upon the complexity of decision making and execution logic.

Is algo trading legal? What about full-auto and semi-auto?

As per NSE circulars, algo trading is allowed only through pre-approved CTCL terminals. The CTCL terminals are provided by a broker to only it’s Authorized Person (AP) based on carefully drafted rules. This strikes out any possibility for an individual client to algo trade (fully automatic). The brokers provide a form of IBT where the trader is required to confirm automated order from charting software through a single click.

The brokers typically market the phrases- “Full automatic trading is available only for sub-brokers”, “individual client gets single-click trading”.

Main article: Full-automatic Trading for Retail in NSE and MCX

SEBI Broad Guidelines on Algorithmic Trading, dated May 21, 2013. Read here

SEBI Broad Guidelines on Algorithmic Trading, dated March 30, 2012. Read here