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Algorithmic Trading in India: Resources, Regulations, and Future – Part II

Algorithmic Trading in India: Resources, Regulations, and Future – Part II

Posted December 13, 2022 at 2:39 pm
Chainika Thakar

See Part I for a history of algorithmic trading in India.

Resources to learn algorithmic trading in India

For learning algorithmic trading, some useful courses and books specifically for algorithmic trading are a big help!

The courses can help if you want to follow a teaching-oriented learning approach. On the other hand, books can help those who like to read and learn with the detailed concepts covered.

Regulations on algorithmic trading in India

There are a specific set of rules and regulations for algorithmic trading in India in accordance with the audit requirements, execution of algorithmic trades and commodity markets.

Audit Requirements

All algorithmic trading firms need to get through a half-yearly audit and auditing can only be done by Exchange empanelled system auditors (CISA certified) listed on the exchange’s website. For the audit requirement, you need to maintain logs for order, trade, control parameters, etc. of the past few years.

Now you must know that the control parameters are specifically needed by Indian exchanges to understand if the strategy of the order placed is verified or not.

Here are certain compliances with regard to the execution of the orders. Firstly, it maintains that all the orders must be tagged with a unique identifier as specified by the exchange. Secondly, new orders can only be executed after accounting for the previous unexecuted orders.

Any modifications in the algorithms are to be approved by the exchange and the system should have enough checks to terminate the execution in case of a loop or a runaway.

Commodity Markets specific

There are certain risk control measures like Daily Price Range, Maximum order size, Position limit, etc. which should be adhered to. Additionally, Market Orders and IOC (Immediate or Cancel) orders will not be placed, only limit orders can be placed.

Mini and micro contracts are not entertained by Algorithmic trading. Also, all orders should be routed through member servers located in India and from approved IDs. These systems cannot have any links with any system or ID located/linked outside India.

Members must ensure that their strategy induces liquidity into the market and should submit a document explaining the same. Members shall also maintain all logs as specified above and ensure regular audits and get approvals for any changes to existing strategies.

Algorithmic trading in India today

Algorithmic trading was introduced and allowed in India in 2008 by the Securities and Exchange Board of India (SEBI). Initially, it started with Direct Market Access (DMA) which was restricted to institutional investors only, but due to the cost advantage and better execution, the trading community adopted it.

Exchanges also played an important role in the adoption of algorithmic trading by offering co-location server ‘racks’ ⁽²⁾ on lease to broking firms in June 2010. The leasing out of server racks helped the brokers to improve trading speed and align with international markets.

In today’s time, most of the leading brokerages along with stock exchanges have the ground for operationalising Direct Market Access (DMA). Brokerages such as Citi, Merrill Lynch, Morgan Stanley, JP Morgan, Goldman Sachs, CLSA and Deutsche Equities have their DMA software to synchronise it with the systems at the stock exchange.

Also, algorithmic trading in India today has become quiteadvanced and there are more High-Frequency Trading (HFT) firms prevalent in the country.

Future of algorithmic trading in India

Algorithmic trading ⁽³⁾ is progressive in many ways – apart from the opportunities for good returns for the trader, algorithmic trading is more systematic since it rules out the impact of human emotions and errors. It also makes the market more efficient and liquid.

So, what is the future of Algorithmic Trading like?

The future of algorithmic trading predicts ⁽⁴⁾ that the resources for algorithmic trading will evolve and become structured and efficient as the market grows.

India has a 50-60% penetration of algorithmic trading in the markets but it is also perceived that algorithmic trading in Indian markets will continue to grow.

Also, there are these two predictions ⁽⁵⁾ for algorithmic trading in India-

  • It is expected that the equities might contribute $8.61 billion in the algorithmic trading market share in 2027.
  • The algorithmic trading market can grow at a CAGR of 11.23% between 2021-2026.

Stay tuned for Part III in which Chainika Thakar offers frequently asked questions about algorithmic trading in India.

Visit QuantInsti to learn more about this topic:

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Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from QuantInsti and is being posted with its permission. The views expressed in this material are solely those of the author and/or QuantInsti and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: API Examples Discussed

Throughout the lesson, please keep in mind that the examples discussed are purely for technical demonstration purposes, and do not constitute trading advice. Also, it is important to remember that placing trades in a paper account is recommended before any live trading.

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