Program trading: Scope, possibilities and challenges in Indian capital markets

Abstract

The markets today have become hyper competitive and cost conscious. Traditional ways of trading may no longer be efficient enough to sustain in this competition and hence new and innovative ways of trading had to be developed. It was this search for more efficient and faster ways of trading that the concept of using computer algorithms for market trading took birth. Automated trading, also called as algorithmic trading or program trading is the name given to process of trading with the help of such algorithms. Precisely defining, automated tradingi is use of a quantitative model to decide what size of orders should be undertaken at what times. Quantitative models require certain inputs which become the basis of decisions that the algorithm takes. These models are based on predefined rules and constraints, basically to time the orders so as to have minimum impact of the trade on the prices. These algorithms help traders to codify their general trading strategy which makes the trading highly efficient and cost effective.