Here's what algo trading is all about

Algo trading is in news because Sebi wants to impose curbs to ensure a more level playing field

What is algo trading?
Algorithmic, or algo, trading is a pre-programmed trading action done by computers. It enables the traders to automate the process of taking trading decisions based on certain preset rules and strategies.

What is high frequency trade (HFT)?
HFT is a part of algo trading, which implies use of high-speed networks or co-location facilities to connect to the trading platform. HFT aims to react to trading opportunities that might last only for a fraction of a second.

What is co-location facility?
Co-location facilities are data centres, typically located near the exchange platform, enabling high-frequency traders to capture such trading opportunities at a cost.

How much of current trading volume is through algo/HFT?
Currently, around 80 per cent of the orders placed on most exchange-traded products are generated by algo and HFT trades. Such orders contribute to approximately 40 per cent of the trades on the exchanges.

Why does Sebi want to impose curbs?
Sebi’s move is aimed at allaying fears and concerns of unfair and inequitable access to the trading systems of the exchanges. To ensure a level-playing field to all participants and reduce risk of erroneous trades and manipulations in stock markets due to advanced communication platforms.

Are there such curbs elsewhere?

Some markets that have imposed some form of curbs are as follows:

1. Toronto Stock Exchange Group (TMX Group) has introduced a minimum resting period of one second

2. US Securities and Exchange Commission (SEC) has approved a proposal to have non-routable immediate-or-cancel orders shall be subjected to a certain sub-milli second delay before arriving at the system.

3. SEC has developed MIDAS (Market Information Data Analytics System) to detect ‘bad’ algo behaviour. Each trading day, the MIDAS system collects about one billion records time-stamped to the microsecond from proprietary data feeds of 13 equity exchanges in the US. This provides data for research into HFT and other issues.