Algorithmic trading | Is Algo Trading legal in India

What is algorithmic trading?

Algorithmic trading is such a term known extensively as it has its alternate name algo trading too. It is the process of executing financial orders as per pre-programmed automated trading instructions. This relatively recent development has kept gaining momentum in India and changed the entire dynamics of trading. The advent of technology struck chords with algo trading among Indian traders. As it promises efficiency along with speed and precision, legality remains a question. Algo trading is profitable when you choose the best algo trading platforms considering your risks and limitations. Below, we discuss the legal aspects of algo trading in India and clarify what one needs to know about the regulatory framework and guidelines set up by the respective authorities. We also answer your questions: "Is algo trading safe?" or "Is algo trading legal in India?

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Is algo trading legal in India?

Yes, algorithmic trading is acceptable and lawful for institutional and retail investors in India. Algorithmic trading is allowed and controlled by the Securities and Exchange Board of India (SEBI), the regulatory body in charge of the country's commodities and securities markets. To guarantee honest and open market practices, it has set rules and regulations for algorithmic trading. At the same time, it offers a framework for market players to use automated trading techniques. As an approved vendor with several Indian stock exchanges, including the NSE and BSE, trade Algos complies strictly with all regulatory requirements. Moreover, before being posted on the site, all pre-designed strategies (also known as trade Originals) are approved by the exchanges, guaranteeing the protection of investors' interests and adherence to legal requirements.

Also read: Algo Trading Bridge

What are the Key Regulations on Algo Trading in India?

• Unregulated platforms: All platforms must obtain SEBI’s approval to offer automated trading strategies in India.
• Past performance claims: SEBI bars unregulated entities or platforms from advertising past profits or expected returns from their algorithms.
•  Audit: Every algo trading company needs a half-yearly audit; this is something that the auditors appointed by SEBI do and no one else. A system audit technically means an appraisal of the trading systems employed.
• Risk management: Market participants engaged in algo trading need to have a well-established risk management system. It entails pre-trade risk checks, post-trade surveillance, and even real-time monitoring.
• Order-to-trade ratio (OTR): The order-to-trade ratio is the ratio of the total volume of all orders, modifications, and deletions. SEBI has framed a few OTR limits to stop bulk ordering by traders. If traders breach the limit on any day for trading, they are penalized, as SEBI has put the notice up. You can read more about these penalties in this circular!
• Co-location guidelines: SEBI has framed the guidelines so that there is equal access to the trading infrastructure, thereby enhancing equal opportunity in the market.

How to Start Algorithmic Trading 

Now, let's see how one can enter into algorithmic trading in India. To initiate algo-trading, one requires knowledge in the following domains:

Computer Programming 

You know that this algorithmic trading is done by computers based on the instructions entered into the system. Those instructions are entered into the computer in the form of computer code. That is, you write code and develop software that's capable of trading in the capital markets based on data imputed. So, you need to know a computer language like Python or C++.
If you are not a programmer, you could hire a programmer who would be able to code the trading algorithm.

Analytical and mathematical skills 

In addition to knowledge of computer programming, the investor would also require analytical skills. That is because you need to analyze a large set of data and identify certain patterns before you can write code to program an algorithm to trade using that software. Since the fundamentals of analytical data and algorithms are founded on mathematical functions, you should also have a good grasp of statistics and calculus.

Financial Markets 

You must, therefore, also be well aware of the financial markets. Being an algo trader does not mean that you might program an algorithm to automate your trading setup. That does not mean you can miss classes on capital markets. You will come up with good trading strategies only if you understand all the various facts regarding equity, derivatives, and commodity markets. Then you codify those strategies with the help of computer programming. Whether you want to trade normally or through algorithms, some essential concepts regarding market understanding must be set in stone. You can't craft algorithms if you don't know about the financial side of the markets.

If you are well-versed in all of the above domains, then you should have no trouble backtesting to find out the efficiency of your strategy. Backtesting: The process of applying your trading strategy to historical data. You could develop a program to backtest your data as well. Besides knowledge in the above domains, skills like logical thinking and econometrics are also beneficial.

Best Practices for Algo Traders 

•  Building compliant trading strategies: Market participants are expected to build their trading strategies within the red mark of SEBI's regulations and guidelines.
•  To keep oneself updated and changeable: One needs to be kept abreast of regulatory changes and adaptable to them to succeed in algo trading.
•  Ethical Levels in Algo Trading: Every algo trader must focus on fairness, transparency, and integrity.

The Future of Algo Trading in India 

As tech gets better and market players adjust to new problems and risks, the speed and effectiveness that algo trading offers will become even more key to India's money world.

By getting a handle on the rules, picking trustworthy platforms, and doing your homework, you can make your way through the algo trading world without much trouble and maybe even boost your trading experience. The outlook for algorithmic trading in India seems bright, giving both individual investors and big players some exciting chances to explore.

Choosing the Right Algo Trading Platforms in India

In India, there are many algo trading platforms available. In recent years, one platform, “Combiz Services Pvt. Ltd," has gained popularity because of its quality services and features. Combiz Services can develop your trading strategies and indicators and automate trading according to your needs. Combiz Services helps to build algorithmic trading strategies. Remember that Combiz Services Private Limited is not an "algo trading platform"; they only develop your trading strategies. Visit its official website for more details: https://copytrading.combiz.org/

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Conclusion 

The legal framework for algo trading in India is well-set, and it can only be practiced if the regulations are followed. Confident market participants can engage in algo trading by making sure they are fully aware of their legal landscape and adhering to the regulations. Algo trading is poised to play a very important role in the country's evolving financial markets if its players and those in the financial markets possess the correct knowledge and adhere to the necessary legal requirements.