Quite a few proprietary traders are taking to algorithm (algo) trading to benefit from arbitrage opportunities. Several small, independent proprietary traders are also upgrading to algo trading in a bid to institutionalise their arbitrage strategies.
Though there is no official data available, it is estimated that about 18-22% of turnover on the exchanges from the proprietary side is currently routed through algo trade. Internationally, roughly 70% of trades are placed through the algo platform. According to market observers, a substantial portion of the volumes generated on the exchanges in the past few months have been through proprietary traders.
With the kind of volatility that exists in the market today, it has become humanly impossible to track minute by minute changes in share prices; there isn?t enough time to execute trades by way of manual arbitrage,? said Prasanth Prabhakaran, president?retail broking, IIFL. ?The advantage of using an algo system is that it is quick and it eliminates manual errors.?
Algo trading has become a need rather than a want for proprietary traders. They will have to move into this space sooner rather than later in order to stay competitive,? said Naveen Kumar, director, RTS Realtime Systems, which currently has about 10 proprietary clients which use the algo platform.
Many of the independent research and technical analysts are taking to algos,? said Girish Dev, director, Future Capital Securities. ?They have realised that they can make more money if they institutionalise some of their strategies through algos.?
Arbitrageurs exploit price differences in scrips to make profits. Algo traders use algorithmic programmes or formulas, while manual arbitrageurs have to physically look for buy and sell opportunities.
According to market observers, the algo strategies go live only after they are backtested for a few years. The shelf-life of these strategies can extend anywhere from six months to three years. Typically, only 60% of strategies developed by a trader might be able to turn a profit. ?The limited shelf-life of the strategies means that traders need to constantly innovate,? said Dev.
At present most of the algo activity is limited to the Nifty index as it is the most liquid. ?As algo trading in Nifty picks up, arbitrage opportunities will reduce and it will become increasingly difficult to make money. The need of the hour is to create a few more liquid indices that will facilitate creation of new algos that can turn a decent profit,? said Dev.