Thread by @technovestor

System or Algo based trading started gaining prominence in US in 80s, picked up in 90s, and exploded from 2000 onwards. Over 80% volumes in these markets are driven by Algo. In April 2008, SEBI releases a policy allowing DMA (Direct Market Access) and opens the floodgates here

DMA simply means that a trade can now be originated by a computer and order execution can happen automatically. in an automated fashion via computers, without manual (human) intervention.

The truest technology revolution in India is the invention of ATM. A person with more

money has to wait in queue before a person who is standing ahead.

The second revolution, in my opinion is Algorithmic Trading. Why? Capital markets have been known to function with inefficiencies in early 90s (before advent of National Stock Exchange), where brokers front-ran

stocks i.e. once brokers got orders with strong information, they may gain from the price movement in his own account. Traders were paying 101 for a 100 rupee stock (1% higher). With advent of NSE price information became simultaneous and real-time and volumes shifted there.

Before 2008, seeds of automated trading had begun with 1-click or touch DMA. The order is generated by a machine and pops-up on the trading/dealing terminal, and will go to exchange after a human confirms it. Creative folks figured ways to automate the click also, similar to

windows automation. SEBI thought it makes sense to legalise and regularise this, and also match up with fast growing global markets who were leaping ahead with volumes due to Algo trading. And this led to the DMA policy coming out in 2008. How does all matter to us as

individuals accessing Capital markets. Well, the policy was launched by SEBI for Institutional players (like brokers, hedge funds, proprietary desks). SEBI started with them and eventually allowed Corporates to do DMA. Exchange is mainly concerned with is that the Algo

trading system does not cause unstability in the system due to excessive high speed orders.

Around 2017, the RESTful API was launched and gained prominence. This is a light-weight API, and an API is nothing but a bridge that connects two software platforms together. If you

think of Worli and Bandra (in Mumbai), the Worli-Bandra sealink is an API.

Now lot of individuals are able to generate their API keys and login for automated trading, and this is growing in prominence. The ecosystem consists of Finance Ministry, SEBI, Exchanges, Broker Members

, Individual / Corporate Managers and Fintech companies providing Algo strategies and Individuals who consume these. Individuals are also building their own algorithms and automating them via tools.

Why is Algo Trading is a revolution for retail? Think about this.

While placing orders manually, it may take upto 2-5 seconds for an average dealer/trader to punch orders, whereas on average an individual might need 20-30 seconds to place an order. The High speed Automated trading systems (which institutions run) can trade in milli and micro

seconds. By the time the trades execute for retail, the prices may move by a lot.

Most individuals do not place their stop loss orders in the system, they keep in their heads (i.e. in real terms, there is no stop-loss). Without a stop-loss, an individual is at the mercy of

the market. Behavioural Finance has proved with numerous experiments, conducted by guys like Daniel Kahneman and Amos Tversky, authors of Thinking, Fast and Slow, that the brain has System 1 (logical) and System 2 (emotional). The emotional brain intervenes with the logical

brain via hope, greed and fear!!

In an Algo Trading System, these challenges are overcome. For the first times in their lives, human beings have the chance to beat their biases. The emotional brain (System 2) is not bad, because without it's trigger, the System 1 is useless

and defunct. The desire to make money (an emotion) comes from System 2, and then System 1 gets into action. However, the emotions that go against this urge, range from Greed, Fear and Hope intervene with the overall process and this causes most of us to lose money when we trade

discretionarily (i.e. without using an Algo System).

All players and stake-holders in the Algo Trading ecosystem are working towards arriving at a semblance and bringing more clarity for algorithms at a retail level. Various regulations on execution and fee collection need more

clarity, which perhaps is best to separately classify for Fintech companies, and the overlaps with existing policy has to be transcended by SEBI.

What is needed is clarity for Retail in Algo, either by a new policy or changes in existing policies where overlaps exist. Going

back to one-touch will be like moving from a Ferrari back to a Ford. We live in the world of Ferrari's, and with Algo Trading it creates a level playing field for retail and traders can have the aspiration own a Ferrari, just like Institutional players would.

Let's not deny

every trader the opportunity for that moment. An ecosystem is only as good as it's weakest member and it's in interest of each member to grow ecosystem together, at the risk of Mutual Fund ecosystem dominating Algo Ecosystem, whereas both can co-exist together and help each other

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