| August 25
Effective ways of trade execution with Algo Platforms
In this age of advanced technology, the
trading world has seen a tremendous growth in terms of digitalization. One of
the modern-day system famous in the trading world is automated trading system.
The automated trading system simply allows the traders to program specific
rules for entries and exits to execute automatically via computers. This has
been rising in India, covering over 50% of the total trades.
While talking about the automated trading, the two
well-known methods in India are colo based algo trading and API
application-based trading. While colo based algo trading is practiced for a
considerable time in the ecosystem, API application is relatively new to the
trading world. Let’s understand each of the methods and analyze the best of
them both to automate your trades.
What is Co-location based Algo trading?
The process of using algorithms to produce, buy and
sell signals based on set parameters such as price movements or volatility
levels. The defined criteria to execute the trades are back tested over a time
so that the current market conditions can match the same. The primary reason
behind the advancement of algo trading over the years is the time saved by the
trader scanning the markets.
While building algorithms, there are usually three
key strategies available to the traders. First, price action strategy- in this
algo will produce buy or sell orders with stop losses as per the defined price
action logic like breakout of previous open, close, high or low points on a
candlestick. Second- technical analysis strategy - the algos release orders
based on the existing indicators like Bollinger Bands, MACD or your own created
indicators. Third one deals with the combination of the previous two, price
action and technical analysis.
In the case of algo trading in India, you can
execute your back-tested strategies on the broker’s terminal directly with no
hassles. Apart from some pre-loaded strategy on the terminal, you can also
integrate the charting tools on the interface of the platform and generate
automated signals. It is important to understand that your trading strategy
plays a vital role in the trade success. The broker’s algo trading platform
is capable enough to transfer any strategy you have planned on Amibroker or
even excel for the purpose of direct execution.
Advantages of Algo Trading
1. Due to direct placement of your order on the broker’s terminal, the execution
speed is extremely high often in milliseconds or even microseconds.
2. These trades are low maintenance with your set-up running throughout the day.
3. Brokers also provide some pre-loaded and pre-approved trading strategy for the
use of traders. (Example: Option Multi Leg Strategies)
4. Access to advanced technology to combat trading and reduce false signals, one
of the major reasons behind losses.
5. Option to add as many advanced trading strategies with no extra costs to
leverage more trading.
6. The trader doesn’t have to be an expert in coding or programming.
Disadvantages of Algo Trading
costs associated with expensive algorithm software, which eat into the
realistic profit potential from your algorithmic trading venture.
trading strategy is applied directly on the broker’s terminal which might
lead to distortion or even disclosure of your trading style.
can be some cases of system failures which may lead to hefty losses in the
API based Automated Trading
What is API based Automated Trading?
This is the process of automating your trading by
connecting your front-end solution to the broker’s execution terminal
technology. API or application programming interface-based trading does not
comprise their own platform like with colo based algorithm trading. They are
the data solutions that give access to the broker’s terminal, which enables you
to retrieve historical data, real-time prices and execution purposes.
provide you with an even clearer picture, there are three major points present
in this trading. One is your algo trading logic, second is API service and
third is the broker’s trading terminal. The process follows in a manner where
you receive data from API service and plan trading strategies as per market
conditions. Next, the trades are sent to API, which send the orders to the
broker’s terminal for execution purposes.
Advantages of API based Trading
1. As compared to the colo based algo trading, API based is much more
cost-effective which can be a major factor while calculating trading returns.
2. This also helps in protecting the unique trading ideology and strategy of the
trader which they must have developed over the years. This is because of the
intervention of coding strategy on API and then executing via broker.
3. You can create bespoke trading solutions with the help of coding advanced
Disadvantages of API based trading
1. Lower Speed: As
mentioned above, this type of trading requires three nodes for the completion
for trades (Algo Logic, Order flow through API & Trades done at broker
terminal). This delays the entire process when compared to colo based algo
trading (Algo logic and trade execution at one place).
2. Prior experience of coding: In order to create your own trading strategies,
have a solid expertise in the programming field (Like Python, Dot Net etct).
the methods mentioned above have their own perks and disadvantages. To summary,
1. The Co-Location basedAlgo based trading is much beneficial in terms of speedy
execution, impossible to match by API based trading.
2. The co-location based algo trading process is often costly to purchase On the
other hand, the API based are much more pocket friendly.
3. Algo based trading can lead to disclosure of your hard-earned trading
strategies, which can be easily avoided in case of API based.
Co-location based setup is normally being acquired by professional traders,
where trading volumes are high and speed (Slippage) is of much concern in
execution, while API based automated setup may be acquired by retail traders
where trading volumes are low and speed is not much of concern.