Co-location-based HFTs, global trading firms lead to 4x jump in share of algo trading in last decade
Algorithmic trading now contributes over half of NSE’s cash market volumes and around 40% of BSE's volumes with the share of such trading seeing a four-fold jump in the last decade.
Experts attribute this surge to the increased usage of algos by proprietary trading desks, co-location based high frequency traders (HFTs), and global trading firms that possess both the technological infrastructure and capital needed for deploying complex, low-latency strategies. Retail retail adoption of algos, however, remains in single digits.
“Algo trading has gained popularity in past few years because it thrives in volatile conditions. Trades are executed instantly, removing emotions like fear and greed. Manual traders often struggle with hesitation and second-guessing, especially when the markets swing sharply,” says Tejas Khoday, CEO of FYERS, a new-age discount broking firm.
“From a market perspective, algos actually enhance price discovery. Machines execute faster, so opportunities get spotted and captured more efficiently,” he added.
In a similar context, Trivesh D, COO at Tradejini says that the bulk of algo volumes come from proprietary and institutional trading firms. “Retail has grown but that’s largely because it started from a near-zero base,” he says highlighting the fact that a SEBI study showed that algo trading accounted for 97% of foreign fund's FY24 profits.
Algorithms – algos in market parlance -- are driven by real-time data and quantitative models while constantly analyzing and adjusting prices based on evolving fundamentals, technical indicators, and order book dynamics.
Both, Khoday and Trivesh said that 95% of the algo trades are from HFTs and co-lo based algo platforms, with retail participation in algos remaining extremely low.
The pace of growth of algos witnessed a spike post-2017–18, when brokerages and hedge funds significantly ramped up investments in low-latency infrastructure with the adoption curve further shifted meaningfully post-COVID.
“Just before the pandemic, we democratised API access by offering it for free. That was a big trigger. Over the next two years, other brokers followed suit, and suddenly a new segment opened up,” said Trivesh.
Referring to the regulatory framework for algos, Khoday says that while the algo consultation has been pending for three years, it is moving now. “They are looking to introduce norms around white-box vs black-box algos, static IP requirements, and registration of strategies,” he said.
While algo trading in India formally began in 2008, co-location -- wherein servers are placed physically close to the exchange to minimise execution time -- became a game-changer after SEBI allowed it in 2010.
Most large trading firms use colo facility. “The demand for it has jumped in the last 2–3 years but for low-frequency players like PMSes, mutual funds or tier-2 brokerages, colo isn’t relevant. It matters only when you’re competing in microseconds,” says Trivesh.
“The trend has also been influenced by the growing number of YouTubers and algo software sellers promoting automated strategies. Additionally, SEBI’s push for tighter compliance and surveillance ironically pushed firms to adopt more sophisticated, rule-based systems,” he added.
Experts also believe that algo trading has significantly enhanced market efficiency by improving speed, precision, and discipline as it helps reduce the impact cost between bid and ask prices, especially in options trading.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.