A Candid Discussion with an Algorithmic Trader

5 min read

Candid Conversation with Algorithmic Trader

The role of Algorithm in a person’s life is too substantial to be ignored. From a simple coffee-making machine to the music system in his car, from elevators to search engine like Google, all are governed by a set of logical instructions – Algorithms or Algos, which enable them to respond to a person’s specific requirement.

With the advent of the internet, Algorithmic potential has been unleashed in its truest form. Defining trends, identifying preferences through social media and targeting relevant groups with tailor-made services have been possible through sophisticated Algorithms put in place.

Of course, with all the technological advancement, stock markets have been on the forefront of adapting to the riveting world of Algorithms. Algorithmic Trading has gradually become the most preferred way to trade on the bourses, with an estimated 80% of the total volumes of the Wall Street.  Institutional investors, hedge funds and large financial brokerage houses have switched to Algo-trading to stay competitive, cost-effective and cater to their clientele.

So, what exactly is Algorithmic Trading or “Black Box Trading”? Does being a successful Algo Trader carries prerequisites like expert programming skills? What is the investment required for Algo trading desk to be set up? These were some of the questions that I pondered upon while deciding a career switch in favour of Algorithmic trading.

This post tries to answer the questions of a complete novice to Algorithmic Trading.

How to setup of an Algo desk?

Algorithmic Trading is a process of using a set of instructions to place an order of buying or selling script with volumes and speed impossible for a human being. The set of instructions is based on various market metrics like price, time, volume and any other user preference. The good part about Algo trading is that it eliminates human intervention thereby making trading sans emotions and intuition.

A typical Algorithmic system’s architecture entails three primary components

  1. Market Data Handler
  2. Strategy Module
  3. Order Router

The market data handler, as the name suggests, receives the market data and stores it. Strategies for trading, in a mathematical model, are fed to the strategy module. It also serves as an interface between the market and a trader. Order Router or manager sends the order back to the exchange for buy/sell. To set up an Algo desk, as a broker you need to identify your co-location to place the servers in close proximity of the exchange, feed in your strategies to your system after having it backtested and authenticated, have a good internet connection, and I think you are good to go!

What are the steps would you suggest to venture into the field?

Well, first and the most important step is to build a solid base. Learn some programming skills and get a grip on the markets. Being good with numbers always helps. Begin by exploring core subjects like statistics and econometrics. Some books like Quantitative Trading by Ernest Chan or Trading & Exchanges by Larry Harris can elaborate on setting up a “proper” Algorithmic trading system.  When you are through with the above-mentioned steps, get your hands dirty in strategy building, modelling techniques, and statistical tools. Get a hang of various trading strategy paradigms, like statistical arbitrages, execution strategies, bid-ask spread. There are a few free courses available online on Udemy and Udacity which are quite good to test waters. There are other paid and advanced courses available for serious learners.

Which are the commonly used programming languages employed by the traders?

C++ remains the most preferred language as far as High-Frequency Trading (HFT) goes. Reason being that memory leaks and related errors are far less in C++ as compared to other languages. Python has come up in a major way for coding strategies as well as backtesting, because it is easier to master, and is backed by good scientific libraries like Numpy. A number of forums today discuss investing and trading strategies coded on Python programmes.

How is the retail participation in Algorithmic trading?

The setting up cost is definitely on the higher side, from a traditional trading terminal. Obtaining a co-location can be an expensive affair. According to recent statistics, nearly 70-80% trade on Wall Street is done using Algos, chiefly by large institutional investors and hedge funds. However, the scene for retail participants is evolving with the offering of web-based platforms. For someone who is not too concerned regarding latency, its works like a charm. Other than that, firms like Interactive Brokers provide retail clients with API and packages so that traders can code their strategies and trade. Once you get a hang of it, it is like a simple Gmail account. You log in to your account, test your strategy, perform back testing, and after optimisation, trade in live markets. Paper trading or testing on a simulator is also highly recommended.

How is the ecosystem for Algorithmic Trading in India? Are companies readily opting for Algorithmic trading given its niche category and involvement of highly skilled practitioners?

Algorithmic Trading was allowed in India by SEBI in 2008. In a span of 8 years, nearly 50% or of the trade by volume or maybe even more than that is Algo-based. That speaks for its popularity. Indian bourses have adapted to the change very well, with a steady increase in the active participants. Both FIIs and domestic funds use the Algo route to place orders.

How does the global future look like?

Very promising actually. It is clear that automation is the future that is driving the world. Be it in any field, automation is making a tectonic shift from a traditional path, and the same applies to stock markets. In US markets, 70-80% of the exchange volumes is happening through automated systems. Emerging markets like India are witnessing exponential growth in the domain. Of course, the markets are maturing every day, so trading costs would decrease after a certain point. Case in point: Automobile Industry, where after the introduction of robots, it was initially thought that the industry would be unsustainable due to high capital cost.

What are few things that a beginner should keep in mind when venturing into this field?

The most important one is that it is just not enough to have a good trading strategy, but also to have a competitive edge. It can range from having innovative ideas which disrupt to having a low brokerage or the kind of markets you have access to, but you have to have a killer proposition if you plan to be successful. Treat this as any regular business, where you have to develop a strategy to outwit the competition. It is important for someone starting new to have the nuances of the trade figured out.

What should be my next step if I want to understand more about this field?

The best way is to find experts and domain authorities to talk and discuss your doubts. Try out freely available tools and resources on the internet. Be prepared to embrace new knowledge and develop new skill sets!

Step Ahead

If you had any such conversations with an Algorithmic Trader or Market Expert, do share with us in the comments section below.

If you are a coder or a tech professional looking to start your own automated trading desk. Learn algorithmic trading from live Interactive lectures by daily-practitioners. Our Algo trading course, Executive Programme in Algorithmic Trading covers training modules like Statistics & Econometrics, Financial Computing & Technology, and Algorithmic & Quantitative Trading.

Also, you can check out our short course on 'Getting started with Algorithmic Trading', it covers all basic concepts of algorithmic trading including strategy paradigms, trading platforms, programming languages and you'll also learn how to set up your own Algo trading desk. This course will also give you a joint certificate from Quantinsti and MCX.


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