In recent years, algorithmic trading has gained popularity in India. Traders have switched from manual to algorithmic trading owing to its inherent benefits of powerful analytical tools, user-friendly interfaces, and seamless connectivity to market data. However, algo trading in India is still developing and poses challenges for algo traders. Be it the complexity of market structure or skill gap, there are still issues that need to be addressed to make it smoother. 

In today’s blog, we’ll discuss the top seven challenges algo traders face in the Indian scenario. 

Algorithmic Trading in India

Algorithmic trading, also known as black box trading or automated trading, is a method of trading that uses a computer program following a defined set of instructions to execute trades. Algo trading has taken the Indian financial sector by storm. As per the National Institute of Financial Management report quoted in the Economic Times, 80% of algorithmic trades generated are from the co-location of BSE and NSE. From this, the popularity of algo trading in India can be gauged. Also, several algo trading platforms like uTrade Algos have become popular. 

However, despite this, many challenges need to be addressed. 

Challenges Faced by Algo Traders in India

1. Complex Market Structure

The structure of financial markets in India is complex. Algo traders need to deal with the intricacies of each of those financial markets. With several market instruments available to traders at various market exchanges, it becomes hard to get algorithms to function seamlessly while ensuring they comply with all the regulations implemented by the relevant bodies. 

2. Latency 

The most important aspect of algo trading is speed. In algorithmic trading, trade execution happens within milliseconds. Hence, the infrastructure needed to provide such high speed has to be infallible. In India, the financial infrastructure is still facing challenges related to latency. This fact affects the trade execution speed. Hence, algo traders in India need robust algo trading platforms that can handle the high volume trade execution with the least amount of latency. 

3. Quality Data Availability 

Another essential for smooth algo trading is the availability of high-quality market data. In India, ensuring the availability of high-quality market data, including real-time price feeds and historical data, can be a hurdle. To optimise and backtest algorithms, algo traders require reliable data feeds. However, in the Indian financial market setup, that may pose a challenge. 

4. Regulatory Compliance

Regulations by relevant regulatory bodies keep changing, depending on the market scenario in India. Algo trading platforms keep themselves updated with this information to avoid any violations. Adhering to rules related to risk management, order types, and reporting obligations adds a layer of complexity to algo trading in India.

5. Technological Infrastructure

While the technological set-up in India has significantly improved, it still has a long way to go. Seamless internet connectivity, server infrastructure, and backup systems are a few essentials without which the algo trading journey of an algo trader in India might not be smooth. Hence, investing in the right technology infrastructure to provide financial growth opportunities to algo traders in India becomes extremely important. 

6. Liquidity 

The success of algorithmic trading strategies depends on market liquidity. In the Indian financial market, certain kinds of stocks and derivatives have low liquidity, resulting in higher impact costs. Before starting their algorithmic trading journey, algo traders in India need to evaluate the liquidity profile of the assets for efficient trade execution. 

7. Talent and Skill Gap

For algo trading, unique skills related to quantitative analysis, programming, and market understanding are needed. In India, algo trading is a relatively new concept, and hence, there is a demand for skilled people in the field. Algo traders in India need to invest in the right professionals or platforms that can develop and implement successful strategies for them. Bridging this talent gap may be challenging for algo traders in India. 

Conclusion

While algo trading in India offers traders a new way to trade, mitigating the challenges mentioned above is imperative. Overcoming these challenges requires planning, awareness and technical skills. Algo trading platforms like uTrade Algos are putting their energies into helping algo traders in India navigate this new space cautiously. As the industry matures, innovative solutions and best practices will emerge, further enhancing the landscape for algo trading in India.