How can retail investors take advantage of automated trading in India

 

While in the western markets, automated trading has captured more than 80% of the stock market, it is slowly growing in India as well. Ever since algo trading strategies were legalized in India by SEBI in 2008, automated trading has started making its mark. Today, it accounts for nearly 40% of all trades that occur on the National Stock Exchange (NSE).

While the retail investors can now indulge in automated trading, they have to go through a rigorous process in order to get their intraday trading strategies automated as the as exchanges in India do not allow retail individuals to automate strategies.

Following are the steps one must take in order to use algo trading strategies as a retail investor.

·        You are required to register as an Authorized Person on the exchanges. To fulfill the process, you are required to pay a one-time fee of Rs 3000 per segment per exchange.

·        Once you have been registered successfully, you’d require a dealer terminal from your broker. The person who is going to be operating the terminal must have clearance for NISM Series VIII Certification.

·        After these steps, you will have to get the algorithm approved and then backtested. The exchange does this to ensure that the algorithm that you want to use wouldn’t have a major breakdown impact on the market.

How can you get the algorithm approved?

·        Your algorithm would need an approval from a certified Chartered Accountant.

·        Then your strategy would have to prove its effectiveness during the mock test that is conducted by the exchange on the UAT (User Acceptance Testing) website.

·        Once you successfully pass the test, your strategy would be approved by the exchange. Usually, this process takes up to a month.

In addition to the expenses that you would incur during the process, you would also have to pay brokerage for trading with the help of your strategy. If you are going to be dealing with 3rd party software and data feeds, you’ll need to setup your infrastructure as well. Following are the steps that you can follow.

You can either build your custom front end or buy one from those that are available.

Then you would also have to buy the data feed from a data vendor to feed the live data into the front end software which would then generate algorithm signals.

A much more easier process however for retail investors is to get in touch with Interactive Brokers, who have an API that they can link to your DMAT account and send trades. It is much easier to setup and manage.

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