DETAILED STUDY ON TRADE'S TRANSITION FROM MANUAL TO ALGORITHMIC TRADE Final

Detailed study on Trader’s transition from Manual to Algorithmic Trade
Chapter No.1 Introduction
Synopsis:
1.1 Meaning
1.2 What is Stock
1.3 Description
1.4 What is online trade
1.5 Why trade in stock market.
1.6 History of automated trading
1.7 Setting up of the stock exchange
1.8 Growth of Stock Markets in the Twentieth Century
1.9 The Start of Algorithmic Trading
1.10 Why go for Algo trading
1.11 Elements of Algo trading
1.12 Learning Algo trading.
1.13 Ways to become an Algo trading professional
1.14 Algorithmic trading strategies and Modelling ideas
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1.1 Meaning:
Technology has played an increasingly important role in the development of securities
markets since the 1990s. It was readily embraced in the backend functions of clearing and
settlement at exchanges, but it has played a more controversial role in the trading process.
Earlier, in the 1970s, there was much debate about moving from open outcry markets to
electronic limit order book markets. The latter became accepted as the dominant form of
trading only in the last decade. A similar controversy now marks the debate on the role of
algorithmic trading in exchanges, where computer algorithms directly place orders to
trade. Policy makers, who largely encouraged the use of technology by mandating best
execution practices for investors in the 1990s.
Quantitative trading is a methodology employing advanced statistical techniques to make

trading decision, which can be traded either manually or electronically. With
advancements in computing power, it is advantageous to implement such back-tested
strategies as algorithmic trading that removes chances of human error significantly. The
frequency of trade can be high or low as per the strategy.
Automated or Algorithmic trading is using computers to generate trading signals, send

orders and manage portfolios. Sophisticated electronic markets or platforms are used by
the algorithms to trade in the similar fashion as done in electronic trading. The difference
is that in algorithmic trading decisions about volume or size, timing and price are
determined by the algorithm.
HFT which is widely known as High-Frequency Trading is a special category of

algorithmic trading characterized by unusually brief positionholding periods, low-latency
response times, and high trading volumes in a day. Algorithms are written so as to utilize
trading opportunities which appear in very brief time periods as short as milli or
microseconds. The margin of each trade is small, which is compensated by fast speed and
large volumes.
1.2 What is Stock?
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Definition:
A stock is a general term used to describe the ownership certificates of any company. A
share, on the other hand, refers to the stock certificate of a particular company. Holding a
company’s share makes you a shareholder.
1.3 Description:
To start with, stock holders do not own corporations; they own shares issued by
corporations. But corporations are a special type of organization because the law treats
them as legal persons. In other words, a corporation files taxes, can own property, can be
sued, etc. The idea that a corporation is a “person” means that the corporation owns its
own assets. A corporate office full of chairs and tables belong to the corporation, and not
to the shareholders.
This distinction is important because corporate property is legally separated from the
property of shareholders, which limits the liability of both the corporation and the
shareholder. If the corporation goes bankrupt, a judge may order all of its assets sold –
but your personal assets are not at risk. The court cannot even force you to sell your
shares, although the value of your shares will have fallen drastically. Likewise, if a major
shareholder goes bankrupt, she cannot sell the company’s assets to pay off her creditors.
Shareholders cannot do as they please with a corporation or its assets. A shareholder can’t
walk out with a chair because the corporation owns that chair, not the shareholder. This is
known as the “separation of ownership and control.”
So, what good are shares then if they aren’t actually the ownership rights we think they
are? Owning stock gives you the right to vote in shareholder meetings, receive dividends
if and when they are distributed, and it gives you the right to sell your shares to
somebody else.If you own a majority of shares, your voting power increases so that you
can indirectly control the direction of a company by appointing its board of directors.
This becomes most apparent when one company buys another: the acquiring company
doesn’t go around buying up the building, the chairs, the employees; it buys up all the
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shares. The board of directors is responsible for increasing the value of the corporation,
and often does so by hiring professional managers, or officers, such as the Chief
Executive Office known CEO.
1.4 What is Online Trading?
The term “trading” simply means “exchanging one item for another”. We usually
understand this to be the exchanging of goods for money or in other words, simply
buying or exchanging something. When we talk about trading in the financial markets, it
is the same principle as what they are actually doing is buying shares of a company. If the
value of those shares increases, then they make money by selling them again at a higher
price ultimately to earn profit.
For a long time, financial trading was purely conducted electronically between banks and
financial institutions. This meant that trading in the financial markets was closed to
anyone outside of these institutions. With the development of high-speed Internet, anyone
who wanted to become involved in trading was able to do so online. Almost anything can
be traded online whether it be stocks, currencies, commodities or physical goods.
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1.5 Why Trade in Stock Market?
1.5.1 Eliminates the middleman:
A few years back, executing a trade was not possible with meeting or calling a share
broker or sub-broker. However, with trading online, it is possible to execute trades within
few clicks and minimum to no communication with share brokers or sub-broker. This is
one of the most alluring benefits of trading online, as completely eradicates the chances
of wrong trade executions due to miscommunication or misinterpretation, which was a
common back in the days.
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1.5.2 Easy Accessibility:
Trading online is the most easily and quickly executable trading options. The prime
requirement for trading online is internet and a computer or smartphone for accessing
trading platforms and the will to trade. This enables you to place trade orders from any
location across the globe with all your comfort. You can easily classify the price and
quantity of your selected stock within a few clicks rather than being stuck on call queues
of the broker.
1.5.3 Real-time monitoring:
Trading online not just facilitates easy trade; it also facilitates easy monitoring of your
account. With the advanced interfaces and tools provided by brokers, it easier than ever
before for investors to monitor their investments’ performance. Investors can have
information available at their fingertips once they log on to their computer or phone.
They can evaluate the profit and loss in real-time, access research reports indicating
market directions and take appropriate actions.
1.5.4 Focused Investments:
Contacting your broker to place trade orders is time-consuming. Considering that there
are several investors calling the broker to place trade requests, it is obvious the broker
might not spend enough time on your call to understand your requirement and give you
the best guidance. Trading investment is an apt solution for this problem as it allows
instantaneous transactions. You can easily research the stock you wish to invest in,
determine the price and quantity, verify the volume on the trading online platform and
place your orders.
1.5.5 Economical Brokerage:
Asking brokers to place and execute your trade orders involve higher brokerage charges.
However, placing orders using the trading online platforms involves a comparatively less
brokerage. That is because setting up and maintaining trading online platforms are more
economical than maintaining branches with executives to assist your trade. Increasing
number of stock broking firms are offering trading services at a comparatively less
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brokerage than that charged for the traditional means. These charges can be further
negotiated if you regularly trade in high volumes.
1.5.6 Faster Transactions:
Speed is one of the prime benefits of trading online. It eliminates the time taken to
connect with the broker and explain your requirement and trade order. You can easily
place your order to buy or sell stocks within a few clicks and a much lesser time. Trading
online also enables you to overview the value of your stocks and the available balance
and margin for your accounts. You can also easily transfer funds from and to your trading
accounts on the go.
1.5.7 Informed Decisions:
One of the lesser known benefits of trading stock trading is the enhancement of
knowledge and information about the stock market and its updates. Trading online
involves being completely responsible for the investment decisions based on the gather
information on the stock. In the process, investors become financially smarter as they
tend to read and understand more about the market in general and stocks in particular. To
facilitate your knowledge, trading online platforms include complete access to all the
research reports published by the stock broking firms.
1.5.8 Seamless process:
Trading online platforms connect you demat and trading accounts to your bank account.
This enables you to seamlessly transfer funds to and from the demat account. This cuts
down the delays involved with cheques and debit slips.
1.5.9 Better ROI:
Better return on investment has been recorded for a large number of traders as compared
to those following the traditional methods. This is majorly a cumulative effect of the
aforementioned benefits of trading stock trading. With trading investments, investors
make well informed decisions, at lower cost and in least time, contributing to enhanced
returns.
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1.6 HISTORY OF AUTOMATED TRADING: -
Estimated 70% of US equities in 2013 were accounted for by Automated Trading. As per
analysts, Algorithmic trading accounts for a third of the total volume on Indian cash
shares and almost half of the volume in the derivatives segment. Being one of the most
talked about topics in financial news, HFT remains highly popular and is further
expanding its reach among emerging markets. Let us look back at the history of this
technology driven trading technique and the risks involved.
1.7 Setting Up of the Stock Exchange:
To start from the very beginning of the trading history, we go back four centuries to
1602. The secondary market for Dutch East India Company shares started off in the first
decade of the seventeenth century. Dutch East India Company in 1602 initiated
Amsterdam’s transformation from a regional market town into a dominant financial
center. With the introduction of easily transferable shares, within days buyers had begun
to trade them. Soon the public was engaging in a variety of complex transactions,
including forwards, futures and optionsand by 1680, the techniques deployed in the
Amsterdam market were as sophisticated as any we practice today.
1.8 Growth of Stock Markets in the Twentieth Century:
The history of the stock market is the history of the changing economy. Computerization
of the order flow in financial markets began in the early 1970s, with some landmarks
being the introduction of the New York Stock Exchange as “designated order
turnaround” known as DOT system, which routed orders electronically to the proper
trading post, which executed them manually. The “opening automated reporting system”
(OARS) aided the specialist in determining the market clearing opening price (SOR;
Smart Order Routing). Innovative Market Systems was launched in 1983 by Michael
Bloomberg.
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1.9 The Start of Algorithmic Trading:
Financial markets with fully electronic execution and similar electronic communication
networks developed in the late 1980s and 1990s. In the U.S., decimalization, which
changed the minimum tick size from 1/16 of a dollar (US$0.0625) to US$0.01 per share,
may have encouraged algorithmic trading as it changed the market microstructure by
permitting smaller differences between the bid and offer prices, decreasing the market-
makers’ trading advantage, thus increasing market liquidity. Till 1998 U.S Securities and
Exchange Commission (SEC) authorized electronic exchanges paving the way for
computerized High Frequency Trading. HFT was able to execute trades more than 1000
times faster than a human. And since that time high-frequency trading (HFT) has become
widespread.By the year 2001, HFT trades had an execution time of less than a second. By
2010 this had shrunk to milliseconds, even microseconds and subsequently nanoseconds
in 2012. In early 2000s high-frequency trading accounted for less than 10% of equity
orders, but this has grown rapidly. Between 2005 and 2009, according to NYSE high-
frequency trading volume grew by 164%.
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1.10 WHY GO FOR ALGO TRADING?
Algorithmic trading is known by various names such as automated trading, black-box

trading, or simply Algo-trading. It is the process of using computers programmed to
follow a defined set of instructions for placing a trade in order to generate profits at a
speed and frequency that is impossible for a human trader. Machines are designed by
humans to get accurate results. There are several reasons which are mentioned below
which hold back the potential of human trader and hence, a machine has to be to take
control and give accurate results.
1.10.1 Human Emotions:

Machines do not have emotions and we can use that to our advantage. In manual trading
this is a huge detriment. Fear and greed prevent us from doing what is right. Machines
don’t cloud their decisions based on any external factors as they just follow what’s
written in the program. When you realise that majority of trades in the market aren’t
driven by emotions, it automatically puts you on a back foot making Algorithmic Trading
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a necessity. Your strategy truly gets a fair chance when you drop emotions out of the
equation.
1.10.2 Accuracy and Speed:

Machines are accurate every single time it comes to dealing with operational things in
trading. For example, filling in the correct order details, I have found myself making silly
mistakes in this department many times. I am pretty sure everyone has done this at least
once in their trading life. Our inefficiency with respect to speed and accuracy can cost us
huge opportunities. Even a skilled trader will take at least 1-2 seconds to place an order,
in the age of machine trading 1-2 seconds is an eternity and the price can move
significantly. This is true especially in terms of HFT trading. The computer will have
placed and closed 100s of orders in that time frame.
1.10.3 Comfort:
Just imagine not having to go through that stressful roller-coaster ride every single day.
This alone is more than enough reason for you to start learning Algorithmic Trading.
After all, the stress part wasn’t mentioned when they sold you trading as a profession, so
why deal with it now?
1.10.4 Scalability:
Given the vast amount of computing power available today, we can run multiple
strategies which can scan thousands of signals for trade opportunities, all at once. This is
not possible for humans by any means.
1.11 ELEMENTS OF ALGORITHMIC TRADING:

Your success as an algorithmic trader is determined not only by your quantitative skills
but also depends on a large extent to the process and the tools you select for analyzing,
devising, and executing your strategies. Let’s get acquainted with the tools required for
the trade.
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1.11.1 Data is everything:

The first and perhaps the most important aspect of algorithmic trading is data. Data is an
algorithmic trader’s best friend. A trader needs to have access to data for the respective
segments of the exchange that he intends to trade in.NSE provides data to the authorized
data vendors which in turn redistribute the data to trading firms and retail traders. Some
of the datavendors for the Indian markets include:
• eSignal
• Globaldatafeeds
• iCharts
• ValveNet
1.11.2 Programming:
Algorithmic trading involves devising & coding strategies by analyzing the

historical/real-time data which is procured from the data vendors. Using languages like
Python, Java, etc. for trading on trading platforms is a method which is extensively used
by algorithmic traders. There are hundreds of external analytical packages that can be
used in these languages, which aid in developing various trading strategies like
momentum based, mean reverting, scalping, strategies based on machine learning
algorithms, sentiment based strategies, etc. A trader it is vital to have a sound
programming knowledge to trade successfully in the markets.
1.11.3 Brokers:
The next aspect in algorithmic trading is choosing the right broker. Considerations that go
into choosing the right broker include:
 Speed and reliability of the trading platform.

 Segments offered.
 Brokerage.
 Leverage and the margin requirements.
 Compatibility of charting softwares with the broker’s platform.
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1.12 LEARNING ALGO TRADING:
With the boom in technological advancements in trading and financial market

applications, algorithmic trading and high-frequency trading is being welcomed and
accepted by exchanges all over the world. It has become the most common way of
trading in the developed markets and is rapidly spreading in the developing economy. In
the sections below, I outline the core areas that are required by traders to learn
algorithmic trading. I also present our readers with a comprehensive picture of the
different ways and means through which these essential skill sets can be acquired.
1.12.1 Step 1: Core areas

Algorithmic trading is a multidisciplinary field which requires knowledge in three
domains, namely,
• Quantitative Analysis/Modelling
• Programming Skills
• Trading/Financial Markets Knowledge
1.12.2 Quantitative Analysis:
If you are an investor/trader who trades based on fundamental and technical analysis, you
would need to shift gears to start thinking quantitatively. It means working on statistics,
time-series analysis, using statistical packages available in MATLAB, R and Python
more actively. Exploring historical data from exchanges and designing new trading
strategies should excite you. Problem-solving skills are highly valued by recruiters across
trading firms.
1.12.3 Trading Knowledge:

As an aspiring algorithmic trader, you are expected to have a good fundamental
knowledge of financial markets, types of trading instruments (stocks, options, currencies,
etc.) types of strategies (trend following, mean reversal, etc.), arbitrage opportunities,
options pricing models, risk management.
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1.12.4 Programming Skills:

If you want to excel in the technology driven domain of automated trading, you should be
willing to learn new skills and you shouldn’t be disinclined to any field. So if you have
never printed “hello world” by compiling your own coding program, it’s time to
download the compiler of your interest – C++/Java/Python/Ruby and start doing it! The
best way to learn to program is to practice, practice and practice. Sound knowledge of
programming languages like Python/C++/Java/R is a prerequisite for an algorithmic
trader.
1.13 Ways to become an Algo trading professional
1.13.1 Getting started with books:

Books are a great resource to learn algorithmic trading. You will find many good books
written on different algorithmic trading topics by some well-known authors. As an
example, to hone your knowledge in derivatives, the “Options, Futures, and Derivatives”
book authored by John C. Hull is considered a very good read for beginners. For
algorithmic trading, one can read the “Algorithmic Trading: Winning Strategies and
Their Rationale” book by Dr. Ernest Chan.
1.13.2 Free resources:

In addition to the books, beginners can follow various blogs on algorithmic trading;
watch YouTube videos, catch trading podcasts (e.g. Better System Trader), attend online
webinars, or get registered on platforms like Quantises to learn to code. One can also
register for the free courses that are available on online learning portals like Quantra and
Courser. Although these free resources are a good starting point, one should note that
some of these have their own shortcomings. For example, books do not give you a hands-
on experience in trading. Free courses on online portals can be subject specific and may
offer very limited knowledge to serious learners. Another important point to note is the
lack of interaction with experienced market practitioners when you opt for some of these
free courses.
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1.13.3 Step 2: Learn from Professionals/Experts/Market Practitioners:
The building blocks in learning Algorithmic trading are Statistics, Derivatives, and
programming languages like Python, MATLAB, R. It becomes necessary to learn from
the experiences of market practitioners, which you can do only by implementing
strategies practically alongside them. You can join any organization as a trainee or intern
to get familiarized with their work ethics and market best practices. If it’s not possible for
you to join any such organization then you can opt for classroom courses/workshops or
paid online courses. Most of the classroom courses/workshops are delivered in the form
of 2 days to 2 weeks long workshops or as a part of Financial Engineering degree
programs. On the online front, there are online learning portals such as Quantinsti,
Quantra and Course. They have industry experts from mathematics and computer science
backgrounds who share their experiences and strategy ideas/tactics with you during the
course. Keeping in mind the need for an online program for working professionals, we at
Quant, offer a comprehensive hands-on course called Executive Programme in
Algorithmic Trading (EPAT). The salient features of the course are listed in the table
below. The objective of the course is to make students market ready upon successful
completion of the course work. For those who want to learn high-frequency trading, there
are limited dedicated resources to do the same. It is often seen that students who would
like to get placed in high-frequency trading firms or in quantitative roles, go for MFE
programs. Most of the MFE programs give a very good overview of mathematical
concepts including Calculus, PDE, pricing models. For learning quantitative trading,
what is also required is the implementation of these skills/theories on actual market data
under simulated environment. It is always better to get trained by practitioners and traders
themselves if the aim is to go out there and make some money! However, if you would
like to pursue research in these fields, then taking a more academic this recommended.
1.13.4 Step 3: Get placed, learn more and implement on the job
Once you get placed in an algorithmic trading firm, you are expected to apply and
implement your algorithmic trading knowledge in real markets for your firm. As a new
recruit, you are also expected to have knowledge of other processes as well, which are
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part of your workflow chain. As an example, firms which trade low latency strategies will
usually have their platform built on C++, whereas in trading firms where latency is not a
critical parameter, trading platforms can be based on a programming language like
Python. Thus, it becomes essential for wannabe and new quant developers to have an
understanding of both the worlds. New recruits working on specific projects may be
given a brief training to get a good grasp on the subject. Trading firms usually make their
new recruits spend time on different desks (e.g. quant desk, programming, risk
management desk) which give them a fair understanding of the work process followed in
the organization. To put it in subtle words, learning in the algorithmic world never stop.
1.14 Algorithmic trading strategies and Modelling ideas
1.14.1 Algorithmic Trading Strategies:

If you look at it from the outside, an algorithm is just a set of instructions or rules. These
set of rules are then used on a stock exchange to automate the execution of orders without
human intervention. This concept is called Algorithmic Trading.
Let me start with a very simple trading strategy. Those who are already into trading
would know about SMA and for those who don’t; SMA is Simple Moving Average.
SMA can be calculated using any predefined and fixed number of days. An algorithmic
trading strategy based on SMA can be simplified in these four simple steps:
• Calculate 5-day SMA

• Calculate 20-day SMA
• Take a long position when the 5-day SMA is larger than or equal to 20-day SMA
• Take a short position when the 5-day SMA is smaller than 20-day SMA
We refer to this algorithmic trading strategy as Moving Average Crossover Strategy. This
was just a simple example. Now don’t get down to thinking that it is all going to be a bed
of roses. Even if it were, then be prepared for the thorns. In everyday trading, far more
complex trading algorithms are used to generate algorithmic trading strategies. All the
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algorithmic trading strategies that are being used today can be classified broadly into the
following categories:
• Momentum/Trend Following
• Arbitrage
• Statistical Arbitrage
• Market Making
1.14.2 Momentum based Strategies:

Assuming that there is a particular trend in the market, as an algo trader, you are
following that trend. Further to our assumption, the markets fall within the week. Now,
you can use stats to determine if this trend is going to continue or if it will change in the
coming weeks. Accordingly, you will make your next move. You have based your
algorithmic trading strategy on the market trends which you determined by using
statistics. This method of following trends is called Momentum Based Strategy.
1.14.3 Arbitrage:
You can also take benefit from the pricing inefficiencies that may exist for the same
underlying across various trading destinations or instrument types. These strategies can
be market neutral and used by hedge funds and proprietary traders widely.
1.14.4 Statistical Arbitrage:

Statistical arbitrage (often abbreviated as Stat Arb or StatArb) is a class of short-term
financial trading strategies that employ mean reversion models involving broadly
diversified portfolios of securities (a few to hundreds) held for short periods of time
(generally seconds to days). These strategies are supported by substantial mathematical,
computational, and trading, platforms.
1.14.5 Market Making:

To understand Market making, let us first talk about Market Makers. According to
Wikipedia, A market maker or liquidity provider is a company, or an individual, that
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quotes both a buy and a sell price in a financial instrument or commodity held in
inventory, hoping to make a profit on the bid-offer spread, or turn. Market making
provides liquidity to securities which are not frequently traded on the stock exchange.
The market maker can enhance the demand-supply equation of securities. Let me give
you an example: The market maker may purchase 1000 shares of IBM for $100 each (the
ask price) and then offer to sell them to a buyer at $100.05 (the bid price). The difference
between the ask and the bid price is only $.05, but by trading millions of shares a day, a
market maker manages to pocket a significant chunk of change to offset his risk.
1.14.6 Paradigms & Modelling Ideas:

Now that you have been introduced to algorithmic trading strategies, let’s take a look on
the strategy paradigms and modeling ideas pertaining to each strategy.
• Market Making
• Statistical Arbitrage
• Momentum
• Machine Learning Based Market Making
As mentioned earlier, the primary objective of Market making is to infuse liquidity in

securities that are not traded on stock exchanges. In order to measure the liquidity, we
take the bid-ask spread and trading volumes into consideration. The trading algorithms
tend to profit from the bid-ask spread. Let’s assume X, a market maker, is a liquidity
provider who can quote on both buy and sell side in a financial instrument hoping to
profit from the bid-offer spread. He will accept the risk of holding the securities for
which he has quoted the price for and once the order is received, he will often
immediately sell from his own inventory. He might seek an offsetting offer in seconds
and vice versa. When it comes to illiquid securities, the spreads are usually higher and so
are the profits. X will take a higher risk in this case. Several segments in the market lack
investor interest due to lack of liquidity as they are unable to gain exit from several small-
and mid-cap stocks at any given point in time. Market Makers like X are helpful as they
are always ready to buy and sell at the price quoted by them. In fact, much of high
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frequency trading (HFT) is passive market making. The strategies are present on both
sides of the market (often simultaneously) competing with each other to provide liquidity
to those who need. So, when is this strategy most profitable? This strategy is profitable as
long as the model accurately predicts the future price variations.
1.14.7 Modelling ideas based on this Paradigm:

The bid-ask spread, and trade volume can be modelled together to get the liquidity cost
curve which is the fee paid by the liquidity taker. If the liquidity taker only executes
orders at the best bid and ask, the fee will be equal to the bid ask spread times the
volume. When the traders go beyond best bid and ask taking more volume, the fee
becomes a function of the volume as well. Trade volume is difficult to model as it
depends on the liquidity takers’ execution strategy. The objective should be to find a
model for trade volumes that is consistent with price dynamics. Market making models
are usually based on one of the two:
1. The first focuses on inventory risk. The model is based on preferred inventory
position and prices based on the risk appetite.
2. The second is based on adverse selection which distinguishes between informed and
noise trades. Noise trades do not possess any view on the market whereas informed
trades do. When the view of the liquidity taker is short term, its aim is to make short
term profit utilizing the statistical edge. In the case of long-term view, the objective
is to minimize the transaction cost. The long-term strategies and liquidity constraints
can be modeled as noise around the short-term execution strategies.
1.14.8 Statistical Arbitrage:

If Market making is the strategy that makes use of the bid-ask spread, Statistical
Arbitrage seeks to profit from statistical mispricing of one or more assets based on the
expected value of these assets. A more academic way to explain statistical arbitrage is to
spread the risk among thousand to million trades in a very short holding time to,
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expecting to gain profit from the law of large numbers. Statistical Arbitrage Algorithms
are based on mean reversion hypothesis, mostly as a pair.
Pairs trading is one of the several strategies collectively referred to as Statistical
Arbitrage Strategies. In pairs trade strategy, stocks that exhibit historical co-movement in
prices are paired using fundamental or market-based similarities. The strategy builds
upon the notion that the relative prices in a market are in equilibrium, and that deviations
from this equilibrium eventually will be corrected.
When one stock outperforms the other, the outperformer is sold short and the other stock
is bought long with the expectation that the short-term diversion will end in convergence.
This often hedges market risk from adverse market movements i.e. makes the strategy
beta neutral. However, the total market risk of a position depends on the amount of
capital invested in each stock and the sensitivity of stocks to such risk.
1.14.9 Momentum
In this particular algo-trading strategy we will take short-term positions in stocks that are
going up or down until they show signs of reversal. It is counter-intuitive to almost all
other well-known strategies. Value investing is generally based on long-term reversion to
mean whereas momentum investing is based on the gap in time before mean reversion
occurs.
Momentum is chasing performance, but in a systematic way taking advantage of other
performance chasers who are making emotional decisions. There are usually two
explanations given for any strategy that has been proven to work historically, either the
strategy is compensated for the extra risk that it takes or there are behavioral factors due
to which premium exists. There is a long list of behavioral biases and emotional mistakes
that investors exhibit due to which momentum works. However, this is easier said than
done as trends don’t last forever and can exhibit swift reversals when they peak and come
to an end. Momentum trading carries a higher degree of volatility than most other
strategies and tries to capitalize on the market volatility. It is important to time the buys
and sells correctly to avoid losses by using proper risk management techniques and stop
losses. Momentum investing requires proper monitoring and appropriate diversification
to safeguard against such severe crashes.
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1.14.10 Modelling ideas

Firstly, you should know how to detect Price momentum or the trends. As you are already
into trading, you know that trends can be detected by following stocks and ETFs that
have been continuously going up for days, weeks or even several months in a row. For
instance, identify the stocks trading within 10% of their 52 weeks high or look at the
percentage price change over the last 12 or 24 weeks. Similarly, to spot a shorter trend,
include a shorter-term price change.
If you remember, back in 2008, the oil and energy sector was continuously ranked as one
of the top sectors even while it was collapsing. We can also look at earnings to
understand the movements in stock prices. Strategies based on either past returns (“price
momentum strategies”) or on earnings surprise (known as “earnings momentum
strategies”) exploit market under-reaction to different pieces of information. An earnings
momentum strategy may profit from the under-reaction to information related to short-
term earnings. Similarly, a price momentum strategy may profit from market’s slow
response to a broader set of information including longer-term profitability.
1.14.11 Machine Learning

In Machine Learning based trading, algorithms are used to predict the range for very
short-term price movements at a certain confidence interval in statistical terms. The
advantage of using Artificial Intelligence (AI) is that humans develop the initial software
and the AI itself develops the model and improves it over time. A large number of funds
rely on computer models built by data scientists and quants but they’re usually static, i.e.
they don’t change with the market. ML based models on the other hand can analyze large
amounts of data at high speed and improve themselves through such analysis.
1.14.12 Modelling idea

A form of machine learning called ‘Bayesian networks’ can be used to predict market
trends while utilizing a couple of machines. An AI which includes techniques such as
evolutionary computation (which is inspired by genetics) and deep learning might run
across hundreds or even thousands of machines. It can create a large and random
P a g e 21 | 66
collection of digital stock traders and test their performance on historical data. It then
picks the best performers and uses their style/patterns to create a new breed of evolved
traders. This process repeats multiple times and a digital trader that can fully operate on
its own is created. Building an algorithmic trading strategy from algo trading strategies to
paradigms and modeling ideas, I come to that section of the article where I will tell you
how to build a basic algorithmic trading strategy. Arbitrage algorithm, Technical
analysis, TWAP and VWAP are a few trading strategies.
1.14.13 TWAP
• This strategy simply breaks up a large order into equal parts and then dribbles buy or
sell orders into the market evenly over the trading session •This is also referred to as
“Iceberging” • This ensures that the price at which the investor buys or Time Weighted
Average Price
•This ensures that the price at which the investor buys or sells is not distorted by
momentary blips in the market
1.14.14 VWAP
• Calculated by weighting a stock’s price quotes through the trading session with volumes
traded at each price •Algorithm’s objective is to execute the order at a price that is as
close as possible to this weighted average •If the price of a buy trade is lower than the
VWAP, it is a Volume Weighted Average Price
• If the price of a buy trade is lower than the VWAP, it is a good trade and bad if the price
is higher than the VWAP
1.14.15 Arbitrage Algorithms

• These algorithms earn a spread from trading on anomalies between securities, trading
venues or asset classes
• For example, simple arbitrage algorithms may earn a ‘spread’ by buying a stock at
Rs. X on the BSE and selling it at Rs. X+0.10 on the NSE
• The transactions have to be executed at rapid succession
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1.14.16 Technical analysis

• These are commonly used by technical analysts to identify a reversal in trends
• They then piggyback on it at an early stage to benefit from the momentum
• Track technical indicators such as the 50 or 200-day moving averages or relative
strength index, to bet on stocks on the verge of breaking out or breaking down.
What is Backtesting?
Backtesting a trading strategy is a process of testing a trading hypothesis/strategy on

market data from prior time periods. Instead of applying a strategy for the time period
forward (to judge performance), which could take years, a trader can simulate his or her
trading strategy on relevant past data. For example, say, a trader wants to test a strategy
based on the hypothesis that Internet IPOs will outperform the overall market. If you
were to test this strategy during the dotcom boom years in the late 90s, the strategy would
outperform the market significantly. However, trying the same strategy after the bubble
burst would result in dismal returns. The maxim ‘past performance does not necessarily
guarantee future returns’ has to be kept into consideration while backtesting a trading
strategy. Keys points to remember when Backtesting a Trading Strategy include:
• Choose the market/ asset segment that one intends to trade.

• Sufficient data to cover different market conditions.
• Select the right platform to code and backtest trading strategy.
• Evaluate the system on different benchmark parameters Process of Backtesting One can
build a trading strategy using programming languages like Python, R, MATLAB, Excel
VBA.
After backtesting a trading strategy, it can be paper traded using a simulator. A simulator
can give insight into the problems faced during the execution of a trading strategy.
Stimulator behaves like an exchange which can be configured for various market
conditions. For simulator testing, the implementation of the testing system would require
additional knowledge for C++/ Java Platforms Used for Backtesting apart from Excel
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VB, a quick backtesting of trading strategy for certain kind of strategies (for those based
on technical analysis) can be done using special platforms such as Amibroker,
Tradestation and Ninja Trader. Amibroker has a good range of technical indicators while
the benefit of TradeStation is that its coding language is very similar to English.
NinjaTrader uses the very widely used and exquisitely documented C# programming
language and the DotNet Framework.
Typical Backtesting Parameters to Evaluate a Trading System include:
• Total P/L
• Average P/L
• Success Ratio
• Maximum Drawdown
• Sharpe Ratio
What is an Automated Trading Platform?
An automated trading platform is offered either by the broker or by any independent

third-party developers. When you open a trading account with a broker, you can get
access to the broker’s automated trading platform. Another way is to subscribe to an
automated platform offered by third-party developers if they suit your trading
requirement.
How to choose an Automated Trading Platform?

When going for an automated trading platform it is very important to look for some
important features before you decide on the automated trading platform you want to trade
on. Different automated trading platforms offer different services which have their own
pros and cons and might suit certain strategies better than the others. We have discussed
important features that you should consider while choosing an algorithmic trading
platform. Backtest results usually show the strategy’s performance in terms of profits and
losses and some popular performance statistics like Sharpe Ratio or Information ratio
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which help to quantify the strategy’s risk-adjusted returns. Hence, a good backtesting
software can be a great plus for an automated trading platform.
1.14.17 Programming Languages

Choice of programming language is very important while deciding which platform to use
for automating your trading strategy. This is because the language that you use for
backtesting can be different from the language used for automating your trading strategy.
Different languages have different pros and cons. Most commonly used programming
languages used for algorithmic trading are C++, C#, Java, R, Python, and MATLAB.
Different automated trading platforms provide access to support trading/backtesting of
certain securities only; some provide specific access to data feeds like Bloomberg,
Thomson/Reuters. For instance, there are platforms dedicated to Forex trading or Equities
trading that too in specific markets. You need to make sure what the automated trading
platform offers and then decide based on your needs. The frequency of data that you
would need should also be taken into account. Some strategies would require daily EOD
data while some other strategies might require intraday trading data.
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Chapter No. 2: METHODS OF DATA COLLECTION
Synopsis:
2.1 Objectives.
2.2 Methods of data collection.
2.3 Sampling Plan.
2.4 Area of study.
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2.1 Objectives:
In every research, there are certain steps that should be followed to solve the research
problem and to achieve the objectives of that research. Research Methodology is a way to
systematically solve the research problem. Therefore, it includes the various steps that are
generally adopted by a researcher in studying the research problem. It not only includes
the research methods but also considers the logic behind the methods that are being used
in the context of research study and explain the reasons of using and not using of a
particular method or technique so that research results are capable of being evaluated
either by the researcher himself or by others.
In general, research objectives describe what we expect to achieve by a projectResearch

objectives divide research aim into several parts and address each part separately. As a
rule of dumb, there would be one research aim and several research objectives to
facilitate the achievement of this aim.
Objectives of Present Study: -
1) To make everyone understand the benefits of algo trading.
2) To know about the change in trading pattern of traders.
3) To understand the trading needs of people.
4) To find out is it possible to trade in stock market with a full-time job.
5) To identify any change in trading pattern and understand the risk appetite of the
traders.
6) To provide a road map for new traders and help people with proper guidelines.
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2.2 Methods of Data Collection:
Primary Data:
Primary data is data that is collected by a researcher from first-hand sources, using
methods like surveys, interviews, or experiments. The data is specific to the problem
under study. Primary data is more costly to obtain than secondary data, but it is also more
current and more relevant to the research project.
Secondary Data:
Secondary data refers to data which is collected by someone other than the investigator
conducting the research. Secondary data analysis can save time that would otherwise be
spent collecting data and, particularly in the case of quantitative data, can provide larger
and higher-quality databases that would be unfeasible for any individual researcher to
collect on their own.
Methods of Data Collection for Present Study:
1) Secondary Methods:
For the present study, secondary data was collected through various sources which
include various books, journals, periodicals, magazines, reports and various web sources.
The details of the same are mentioned in the bibliography section.
2) Primary Methods:
For the present study, data was also collected through primary source. The primary
source includes collecting responses through a pre designed questionnaire from investors.
2.3 Sampling Plan:
Sampling means the process of selecting a part of the population. A population is a group
people that is studied in a research. These are the members of a town, a city or a country.
It is difficult for a researcher to study the whole population due to limited resources e.g.;
P a g e 28 | 66
time, cost and energy. Hence the researcher known as sampling. It makes the research
activity manageable and convenient for the research. The reliability of the findings of a
research depends upon how well you select the sample.
Methods of Sampling:
(A) Probability Sampling:
It is a type of sampling where each member of the population has a known probability of
being selected in the sample. When a population is highly homogeneous, its each member
has a known chance of being selected in the sample.
The types of Probability Sampling are:
1) Simple Random Sampling - Here, the members of the sample are selected randomly
and purely by chance. As every member has an equal chance of being selected in the
sample, random selection of members does not affect the quality of the sample.
Hence the members are randomly selected without specifying any criteria for
selection.
2) Stratified Random Sampling - The population is divided into Homogeneous sub

groups on the basis of similarities of the members and then members from each sub -
group are selected randomly. The purpose is to address the issue of less homogeneity
of the population and to make a true representative sample.
3) Systematic Sampling - A member occurring after a fixed interval is selected. The

member occurring after the fixed interval is known as the Kth element. For instance,
if a research wants to select member occurring after every 10 numbers, the Kth
element become 10th element. As it follows a systematic technique for selecting
members, it is called systematic sampling.
4) luster Sampling - With cluster sampling, every member of the population is assigned
to one, and only one, group. Each group is called a cluster. A sample of clusters is
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chosen, using a probability method (often simple random sampling). Only

individuals within sampled clusters are surveyed.
5) Multi - Stage Sampling - With multistage sampling, we select a sample by using

combinations of different sampling methods.
For example, in Stage 1, we might use cluster sampling to choose clusters from a
population. Then, in Stage 2, we might use simple random sampling to select a subset of
elements from each chosen cluster for the final sample.
(B) Non-Probability Sampling:
It is a type of sampling where each member of the population does not have known
probability of being selected in the sample. Each member of the population does not get
an equal chance of being selected in the sample. It is adopted when each member of the
population cannot be selected, or the researcher deliberately wants to choose members
selectively.
The types of non - probability sampling is explained as below:
1) Purposive Sampling - It is a type of sampling where the members for a sample are
selected according to the purpose of the study. E.g.- If the researcher wants to study the
impact of drugs abuse on health, every member of the society would not be the best
respondent for this study. Only the drug addicts can be the best respondents for this study
as they have undergone impacts of drug abuse on their health and they can provide real
data for this study.
2) Convenience Sampling - It is a type of sampling where the members of the sample are
selected on the basis of their convenient accessibility. Only those members are selected
which are easily accessible to the researcher.
3) Snow Ball Sampling - It is also called chain sampling. It is adopted in situations where
it is difficult to identify the members of the sample Here one respondent identifies other
respondents (from his friends or relatives) for the study.
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4) Quota Sampling- In this type of sampling, the members are selected according to some
specific characteristics chosen by the researcher. These specific characteristics serve as a
quota for selection of members of the sample. Hence the members are selected based on
these specific characteristics such as age, sex, religion, profession, ethnicity, interest and
so on.
Sample Size:
Sample size determination is the act of choosing the number of observations or replicates
to include in a statistical sample. The sample size is an important feature of any empirical
study in which the goal is to make inferences about a population from a sample.
Sampling Plan for the Present Study
2.4 Area of Study:
Ulhasnagar is a city located in the Thane district Situated 58 km from Mumbai. This city
is part of Mumbai Metropolitan Region managed by MMRDA. It had an estimated
population of 506,098 at the 2011 Census. This 28 square kilometer area has 389,000
people of Sindhi descent, the largest enclave of Sindhis in India.
Originally, known as Kalyan Military transit camp, Ulhasnagar was set up specially to
accommodate 6,000 soldiers and 30,000 others during World War II. It was formed as a
colony of migrants, especially Sindhis during the Partition of India. Around 1,00,000
Sindhi-speaking refugees were relocated to deserted military camps here from the newly
constructed West Pakistan. Even though they took shelter in Ulhasnagar with a dream of
returning to their native land after some days, they had to live the rest of life in this land.
Gradually they settled here by constructing homes and establishing businesses.
Ulhasnagar is considered as one of the largest denim jeans manufacturer. It has number of
small businesses, manufacturing quality denims with an effective cheap labour. Some of
the manufacturers export jeans worldwide. The city is also famous for its furniture
market, cloth market and electronic market.
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CHAPTER NO. 3: REVIEW OF LITERATURE
3.1 Review of literature.

3.2 Research Gap Analysis.
P a g e 32 | 66
3.1 Review of literature:
1. SUBRAHMANYA KUMAR (NOV 2018): Algorithmic trading or algo trading is the

use of computer programs and software to execute trades based on pre – defined criteria
and without any human intervention. It is the use of mathematical models to analyze
every quote and trade in the stock market, identify liquidity opportunities, and turn the
information into intelligent trading decisions. Algorithmic trading, or computer-directed
trading, cuts down transaction costs, and allows investment managers to take control of
their own trading processes. It is a style or method of trading and not a separate business.
High Frequency Trading (HFT) is a subset of Algorithmic trading, and this type of
trading involves buying and selling thousands of shares in fractions of seconds. HFT
came into spotlight about two years ago when Goldman Sachs sued one of their former
employees for stealing code that was used in one of their programs used to execute this
type of trade. In 2008, India allowed the first Direct-Market Access (DMA) and
Algorithmic trades to go through. Since then, Algorithmic trading has taken off and now
constitutes a sizable percentage of all trading activity on the National Stock Exchange
(NSE) and the BSE. This paper tries to analyze the Trends, Concerns and Prospects of
Algorithmic Trading in Indian Financial Markets.
2. Nidhi Aggarwal and Susan Thomas (2014): The causal impact of algorithmic trading
on market quality has been difficult to establish due to endogeneity bias. We address this
problem by using the introduction of co-location, an exogenous event after which
algorithmic trading is known to increase. Matching procedures are used to identify a
matched set of firms and set of dates that are used in a difference-in-difference regression
to estimate causal impact. We find that securities with higher algorithmic trading have
lower liquidity costs, order imbalance, and order volatility. There is new evidence that
higher algorithmic trading leads to lower intraday liquidity risk and a lower incidence of
extreme intraday price movements.
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3. Rajan Lakshmi A and Dr. Vedala Naga Sailaja (2017): This paper provides the first
direct evidence for the impact of AT and HFT on Indian Stock market. Research,
undoubtedly, has an important role to play in framing any policy. Algorithmic Trading
and, particularly, High Frequency Trading and Colocation, are one of the most debated
issues impacting the way the securities transactions are being conducted in the world.
Speedy execution, accuracy, reduced costs and avoiding the errors of human emotions are
some of the reasons for its increasing popularity. At the same time, the development of
such technology raises several regulatory challenges, particularly with respect to market
manipulation and ensuring equity and integrity of the markets. And since this High
frequency trading is still at a relatively nascent stage in India, research is also at a nascent
stage. No empirical evidence on how AT is hurting the markets. Issues like market
manipulation have existed since long.
4. Terrence Hendershott (2012): In his research the author examines the role of
algorithmic traders (AT) in liquidity supply and demand in the 30 DAX stocks on the
Deutsche Boerse in January 2008. AT represent 52% of market order volume and 64% of
nonmarketable limit order volume. AT more actively monitor market liquidity than
human traders. AT consume liquidity when it is cheap, i.e., when the bid-ask quotes are
narrow, and supply liquidity when it is expensive. When spreads are narrow AT are less
likely to submit new orders, less likely to cancel their orders, and more likely to initiate
trades. AT react more quickly to events and even more so when spreads are wide.
5. Pageant Media: The emergence of algorithmic trading as a viable and often preferred
execution mechanism has created a need for new suites of trading analytics to assist
investors compare, evaluate, and select appropriate algorithms. Unfortunately, many of
the existing algorithms do not provide necessary transparency to make informed trading
decisions. In this paper we provide a dynamic algorithmic decision-making framework to
assist investors determine the most appropriate algorithm given overall trading goals and
investment objectives. The approach is based on a three step process where investors
choose their price benchmark, select trading style (risk aversion), and specify adaptation
tactic. The framework makes extensive use of the Algren & Chris (1999, 2000) efficient
trading frontier.
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6. Charles M. Jones (Mar 2013): This paper reviews recent theoretical and empirical
research on high-frequency trading (HFT). Economic theory identifies several ways that
HFT could affect liquidity. The main positive is that HFT can intermediate trades at
lower cost. However, HFT speed could disadvantage other investors, and the resulting
adverse selection could reduce market quality.
Over the past decade, HFT has increased sharply, and liquidity has steadily improved.
But correlation is not necessarily causation. Empirically, the challenge is to measure the
incremental effect of HFT beyond other changes in equity markets. The best papers for
this purpose isolate market structure changes that facilitate HFT. Virtually every time a
market structure change results in more HFT, liquidity and market quality have improved
because liquidity suppliers are better able to adjust their quotes in response to new
information.
Many of the regulatory issues associated with HFT are the same issues that arose in more
manual markets. Now regulators in the US are appropriately relying on competition to
minimize abuses. Other regulation is appropriate if there are market failures. For instance,
consolidated order-level audit trails are key to robust enforcement. If excessive messages
impose negative externalities on others, fees are appropriate. But a message tax may act
like a transaction tax, reducing share prices, increasing volatility, and worsening liquidity.
Minimum order exposure times would also severely discourage liquidity provision.
7. Albert J. Menkveld and Terrence Hendershott(2010): Algorithmic trading has sharply

increased over the past decade. Does it improve market quality, and should it be
encouraged? We provide the first analysis of this question. The NYSE automated quote
dissemination in 2003, and we use this change in market structure that increases
algorithmic trading as an exogenous instrument to measure the causal effect of
algorithmic trading on liquidity. For large stocks in particular, algorithmic trading
narrows spreads, reduces adverse selection, and reduces trade-related price discovery.
The findings indicate that algorithmic trading improves liquidity and enhances the
informativeness of quotes.
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8. Brandon Beckhard and David Franke (2016): survey and implement a number of
known high frequency trading strategies. These strategies take advantages of this high
frequency data and attempt to trade intraday from frequencies ranging from milliseconds
to minutes, some utilizing machine learning techniques. While discussing and
implementing these strategies was insightful, we fail to make significant profit after
accounting for transaction costs. That is not to say these strategies do not work in general.
We also hope to elucidate where our strategies fall short and where to improve them.
9. Dimitar Bogoev and Arzé Karam(2017): We develop a new approach to reflect the
behavior of algorithmic traders. Specifically, we provide an analytical and tractable way
to infer patterns of quote volatility and price momentum consistent with different types of
strategies employed by algorithmic traders, and we propose two ratios to quantify these
patterns. Quote volatility ratio is based on the rate of oscillation of the best ask and best
bid quotes over an extremely short period of time; whereas price momentum ratio is
based on identifying patterns of rapid upward or downward movement in prices. The two
ratios are evaluated across several asset classes. We further run a two-stage Artificial
Neural Network experiment on the quote volatility ratio; the first stage is used to detect
the quote volatility patterns resulting from algorithmic activity, while the second is used
to validate the quality of signal detection provided by our measure.
10. Marcus Bendtsen and Jose M.Peña(2016): This paper introduces a new
probabilistic graphical model called gated Bayesian network (GBN). This model evolved
from the need to represent processes that include several distinct phases. In essence, a
GBN is a model that combines several Bayesian networks (BNs) in such a manner that
they may be active or inactive during queries to the model. We use objects called gates to
combine BNs, and to activate and deactivate them when predefined logical statements are
satisfied. In this paper we also present an algorithm for semi-automatic learning of
GBNs. We use the algorithm to learn GBNs that output buy and sell decisions for use
in algorithmic trading systems. We show how the learnt GBNs can substantially lower
risk towards invested capital, while they at the same time generate similar or better
rewards, compared to the benchmark investment strategy buy-and-hold. We also explore
some differences and similarities between GBNs and other related formalisms.
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11. Rajan Lakshmi (2017): Research, undoubtedly, has an important role to play in
framing any policy. Algorithmic Trading and, particularly, High Frequency Trading and
Colocation, are one of the most debated issues impacting the way the securities
transactions are being conducted in the world. Speedy execution, accuracy, reduced costs
and avoiding the errors of human emotions are some of the reasons for its increasing
popularity. At the same time, the development of such technology raises several
regulatory challenges, particularly with respect to market manipulation and ensuring
equity and integrity of the markets. And since this High frequency trading is still at a
relatively nascent stage in India, research is also at a nascent stage This paper provides
the first direct evidence for the impact of AT and HFT on Indian Stock market. No
empirical evidence on how AT is hurting the markets. Issues like market manipulation
have existed since long.
12. Ritesh Dubey and Yogesh Chauhan (2017): Technology and innovation have been the
driving forces behind financialization across the globe. One such technological advent, in
the pursuit for minimizing the risk and maximizing the return and in order to adhere to
the financial sector changes, is Algorithmic Trading (AT). Though AT is being used
extensively across the world, there is a lack of academic research on the evidence of AT
in most of the markets. The lack of evidence stems from the ambiguity in definitions of
AT and High Frequency Trading (HFT) and their usage interchangeably. The lack of
evidence also hinders the understanding and interpretation of the impact of ever-
increasing unprecedented growth in the velocity of financial transactions on the social
machinery of global economies. We take advantage of the clear definition and
identification of AT in the Indian equity market to provide evidence of AT and
interpreting it as the transaction velocity element of financialization. We also attempt to
decipher the impact of AT, symbolizing the transaction velocity element of
financialization, on the price discovery process.
13. Alex Frino and Tina Prodromou (2017): This study examines the impact of
corporate earnings announcements on trading activity and speed of price adjustment,
analyzing algorithmic and non-algorithmic trades during the immediate period pre- and
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post-corporate earnings announcements. We confirm that algorithms react faster and

more correctly to announcements than non-algorithmic traders. During the initial surge in
trading activity in the first 90 s after the announcement, algorithms time their trades better
than non-algorithmic traders, hence algorithms tend to be profitable, while non-
algorithmic traders make losing trades over the same time period. During the pre-
announcement period, non-algorithmic volume imbalance leads algorithmic volume
imbalance, however, in the post announcement period, the direction of the lead–lag
association is exactly reversed. Our results suggest that as algorithms are the fastest
traders, their trading accelerates the information incorporation process.
3.2 Research Gap Analysis:
The summary of the above research states an urgency of research needs to identify
interweave or integrated approach on trader’s attention towards algorithmic trade and
implement proper knowledge and provide guidelines in order to take a successful trade.
None of the research shows the integrated approach of all these dimensions and further
no research is conducted on any traders using algorithm in Ulhasnagar. To fulfill the gap;
the present study shows its inimitability of mounting a relationship between traders using
algorithm and states any problems they came across and solution to them. This research
will help other traders to know about the benefits of algorithmic trade and help other
traders to use algorithm to manage their work and trading needs.
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CHAPTER NO. 4. FINDING, ANALYSIS AND INTERPRETATION
Synopsis:
4.1 Age of the respondents
4.2: Gender of the respondents
4.3: Marital Status.
4.4: Occupation.
4.5: Your Annual Income
4.6: What is the percentage of savings you save from your income?
4.7: Where do you invest your savings?

4.8: What is your investment pattern in Stock Market?
4.9: You trade in stocks which give you
4.10: You came across Algo Trading through which sources?
4.11: How have you traded through Algorithm
4.12: You trade using algorithm because
4.13: Can Algorithmic Trading be viewed as a helpful platform to balance your job and
trading needs?
4.14: Is there a need for creating awareness and giving guidelines about the benefits of
algorithmic trade?
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Table No 4.1: Age of the Respondents
Particulars Responses Percentage%

Below 21 Years 4 4
Between 21-30 Years. 50 50
Above 50 Years. 0 0
Total 100 100
Graph 4.1: Age of the Respondent
3%
4%
0% Below 21 Years
Between 21-30 Years.
43% Between 31-40 Years.
Between 41-50 Years.
50%
Above 50 Years.
It is been observed that out of the 100 respondents 50 respondents belong to the age
between 21-30, 43 respondents belong to the age between 31-40, 4 respondents belong to
the age below 21, 3 respondents are between the age 41-50 and there are no respondents
above 50 years.
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Table No 4.2: Gender of the Respondents.

Male 89 89
Female 11 11
Total 100 100
Graph 4.2: Gender of the Respondent
11%
Male
Female
89%
It is been observed that out of the 100 respondents 89 respondents are male and 11
Respondents are female. It is been observed that most of the algorithmic traders are men.
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Table No 4.3: Marital Status.

Single 55 55
Married 45 45
Total 100 100
Graph 4.3: Marital Status.
45% Single
55% Married
It is been observed that out of the 100 respondents 55 respondents are single and 45
respondents are Married.
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Table No 4.4: Occupation.
Particulars Responses Percentage

Student. 24 24
Employed. 46 46
Self Employed. 23 23
Full Time Investor. 7 7
Total 100 100
Graph 4.4: Occupation.
7%
24%
23% Student
Employed
Self Employed
Full time Investor
46%
It is been observed that out of the 100 respondents when asked for occupation, 46
respondents i.e the majority of the respondents are employed, 23 respondents are self-
employed, 23 are students and 7 respondents are Full time investors.
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Table No 4.5: Your Annual Income

Below Rs 2.5 Lakhs. 23 23
Between Rs 2.5 - 5 Lakhs. 29 29
Between Rs 5 - 10 Lakhs. 45 45
Above 10 Lakhs. 3 3
Total 100 100
Graph 4.5: Your Annual Income
3%
23%
Below Rs 2.5 Lakhs.
Between Rs 2.5 - 5 Lakhs.
45%
Between Rs 5 - 10 Lakhs.
Above 10 Lakhs.
29%
It is been observed that out of the 100 respondents when asked for annual income, 45
respondents which is the majority of the respondents are in between the income of 5-10
lakhs, 29 respondents are respondents are in between the income of 2.5-5 lakhs, 23
respondents have income below 2.5 lakhs and 3 respondents are above the income of 10
lakhs.
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Table No 4.6: What is the percentage of savings you save from your income?

Less than 15% 52 52
Between 15-30% 46 46
More than 30% 2 2
Total 100 100
Graph 4.6: What is the percentage of savings you save from your income?
2%
Less than 15%

46% Between 15-30%
52%
More than 30%
It is been observed that out of the 100 respondents when asked for Savings from their
income, 52 respondents which is the majority of the respondents save less than 15% of
their income, 46 respondents save between 15-30% of their income and 2 respondents
save more than 30% of their income.
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Table No 4.7: Where do you invest your savings?
Particulars Responses
Savings Bank. 93
Fixed Deposit. 15
Shares 74
Gold/Silver 18
Mutual Funds. 19
Graph 4.7: Where do you invest your savings?
It is been observed that out of the 100 respondents when asked for their investment of
savings from their income in multiple choices, 93 respondents which is the majority of
the respondents keep their money in savings bank and 74 respondents invest in shares. 15
respondents keep money in fixed deposit, 18 invest in gold or silver and 19 respondents
invest in mutual funds.
P a g e 46 | 66
Table No 4.8: What is your investment pattern in Stock Market?
Intraday Trade 78
Swing Trade 33
Long Trade 36
Graph 4.8: What is your investment pattern in Stock Market?
It is been observed that out of the 100 respondents when asked for their investment
pattern in multiple choices, 78 respondents which is the majority of the respondents trade
in intraday, where as 33 respondents trade in swing trade and 36 respondents trade in
long trade.
P a g e 47 | 66
Table No 4.9: You trade in stocks which give you
High Risk/High Return. 55
Low Risk/ Low Return. 28
Low Risk/ High Return. 71
Graph 4.9: You trade in stocks which give you
It is been observed that out of the 100 respondents when asked for their preference in
stocks in multiple choices, 71 respondents said they prefer stock with low risk and high
profit. Whereas, 55 respondents prefer high risk and high return and 28 respondents
prefer low risk and low profit.
P a g e 48 | 66
Table No 4.10: You came across Algo Trading through which sources?
Stock Brokers 42
Other Traders 49
Online 37
Friends 41
Graph 4.10: You came across Algo Trading through which sources?
It is been observed that out of the 100 respondents when asked for the source through
which they came across algo trading in multiple choices, 49 respondents said they heard
about it through other traders, 42 respondents said they heard it through stock brokers, 41
respondents said they came across algo trading through friends and 37 respondents said
they came across it Online.
P a g e 49 | 66
Table No 4.11: How have you traded through Algorithm
On your own by designing your own 12
software.
By Help of Brokers. 59
With the help of Third Party Algo traders. 67
Graph 4.11: How have you traded through Algorithm
It is been observed that out of the 100 respondents when asked for how have they traded
using algorithm, 67 respondents which is maximum respondents said they traded through
algorithm with the help of third party algo traders, 59 respondents said they traded by the
help of brokers and 12 respondents said they designed their own software to trade
algorithm.
P a g e 50 | 66
Table No 4.12: You trade using algorithm because
It eliminates Time Lag for placing orders. 17
It minimizes skeptical Behavior. 10
It allows you to trade with your day to day 18

job.
All of the above. 55
Graph 4.12: You trade using algorithm because:
It is been observed that out of the 100 respondents when asked for why they used
algorithm to trade, 18 respondents said it helped them to trade with their day to day job,
10 respondents said it minimized their skeptical behavior, 17 respondents said it
eliminated their time lag for trade and the majority which is 55 respondents said they
agree with all the options.
P a g e 51 | 66
Table No 4.13: Can Algorithmic Trading be viewed as a helpful platform to balance

your job and trading needs?

Yes 95 95
No 5 5
Total 100 100
Graph 4.13: Can Algorithmic Trading be viewed as a helpful platform to balance

your job and trading needs?
5%
Yes
No
95%
It is been observed that out of the 100 respondents when asked for algorithmic trading
being used as a platform to balance their job and trading needs; 95 respondents have
agreed to it constituting the majority and 5 respondents said it doesn’t help them much
with their job.
P a g e 52 | 66
Table No 4.14: Is there a need for creating awareness and giving guidelines about
the benefits of algorithmic trade?

Yes 97 97
No 3 3
Total 100 100
Graph 4.14: Is there a need for creating awareness and giving guidelines about the
benefits of algorithmic trade?
3%
Yes
No
97%
It is been observed that out of the 100 respondents when asked for creating awareness
and giving guidelines about benefits of algo trading, 97 respondents have agreed to it that
it is necessary to spread awareness constituting the majority and 3 respondents said it
there is not much need.
P a g e 53 | 66
CHAPTER NO. 5. CONCLUSION
Synopsis:
5.1 Conclusion
5.2. Recommendation and Suggestions
P a g e 54 | 66
5.1 Conclusion:
The main objective and purpose of the study is to understand the behaviour of traders in
the market. It is important to note that this study was conducted in order to provide
knowledge about algorithmic trade and its benefits.
It is been observed that many traders face difficulty in trading because they either are
doing a full-time job or they cannot continuously give full time to trade. With the boom
in technological advancements in trading and financial market applications, algorithmic
trading and high-frequency trading is being welcomed and accepted by exchanges all
over the world.
It has become the most common way of trading in the developed markets and is rapidly
spreading in the developing economies. The above survey outlines the core areas that any
aspiring algorithmic trader ought to focus on to learn algorithmic trading, implementing
the knowledge of trading and focusing on core trading and programming.
It also presents a comprehensive picture of the different ways and means through which
these essential skill sets can be acquired. This research was conducted in order to gather
information about the traders who invest in stock market and the challenges faced by
them because of their jobs. Learning and implementing algorithm to trade stocks helps
the trader to minimize the challenges faced by him.
P a g e 55 | 66
5.2. Recommendation and Suggestions

This research was conducted in order to understand the issues faced by traders in stock
market. It is been observed that many traders have good knowledge about stock, but they
cannot perceive their career in stock market because of its dynamic nature and
uncertainty. Algorithmic trading is a platform which help traders to boost their
confidence in trading and helps them manage their job and trading needs. This research
which I conducted in Ulhasnagar manages and covers various aspects and problems faced
by traders. It also helps with suggestions and various ways of building their own trading
strategy.
An important suggestion is that many traders and people are unaware about the benefits
of algorithmic trading. Many people were unaware about the term algorithmic trading.
This research helps in understanding various aspects and simplifies the term to make
people understand the benefits about the program. The importance of algorithmic trade is
in a shadow and with the help of my survey algorithmic trade is simplified and it attracts
any aspiring traders who wants to make their place in stock market. The project emphasis
on core programming and sound knowledge on strategies and analysis of market
behavior. People should be given proper knowledge and institutes must be provided to
learn and understand algorithmic. Many traders should be informed about third party algo
traders so that they use their software to trade. If a trader wants to trade using algorithm,
he does not have to invest time in learning programming he simply can use the help of
other algo traders and if he wants to learn there is an ocean of knowledge provided in the
project.
P a g e 56 | 66
REFERENCES
1) Author name: Subrahmanya Kumar, Date of issue: 21st November 2018, Volume-5,
Issue-7, ISSN: 2249-0558.
2) Author name: Nidhi Aggarwal and Susan Thomas, publication: Indira Gandhi
Institute of Development Research (IGIDR), Date of issue: July 2014, JEL Code:
G10, G18
3) Author name: Rajan Lakshmi A and Dr. Vedala Naga Sailaja, publication:
International Journal of Mechanical Engineering and Technology (IJMET), Date of
issue: 12, December 2017, Volume 8, Issue, pp. 817–825, ISSN Print: 0976-6340
and ISSN Online:0976-6359.
4) Author name: Terrence Hendershott and Ryan Riordan, publication: Algorithmic

Trading and the Market for Liquidity, Date of issue: April 11, 2012, Journal of
Financial Markets, 2003, vol. 6, issue 3, 233-257.
5) publication: Published By Pageant Media Ltd, Date of issue : December 31, 2005,
vol. 1 no. 1 12-21, Print Issn: 1559-3967 and Online Issn: 2168-8427
6) Author name: Charles M. Jones, publication: Columbia Business School Research,

Date of issue: 21 Mar 2013, Paper No. 13-11
P a g e 57 | 66
7) Author name: Terrence Hendershott and Albert J. Menkveld, publication: VU

Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA), Date of
issue: August 30, 2010, Journal of Finance, Vol. 66, pp. 1-33
8) Author name: Brandon Beckhard and David Frank, publication: A Survey of High-
Frequency Trading Strategies, Date of issue: June 6, 2016, ISSN Online: 0976-6359.
9) Author name: Dimitar Bogoev and Arzé Karam, publication: Physica A: Statistical
Mechanics and its Applications, Date of issue: 15 October 2017, Volume 484, Pages
168-181.
10) Author name: Marcus Bendtsen and Jose M.Peña, publication:International Journal
of Approximate Reasoning, Date of issue: February 2016. Volume 69, Pages 58-80.
11) Author: Rajan Lakshmi Date of issue: 7 October 2016, publication: International
Journal of Mechanical Engineering and Technology (IJMET), Volume 8, Issue 12,
pp. 817–825, Article ID: IJMET_08_12_087, ISSN Print: 0976-6340.
12) Author name: Ritesh Dubey and Yogesh Chauhan, publication: Research in
International Business and Finance, Date of issue: December 2017, Volume 42,
Pages 31-38.
13) Author name: Alex Frino and Tina Prodromou, publication: Pacific-Basin Finance
Journal, Date of issue: October 2017, Volume 45, Pages 34-51
P a g e 58 | 66
14) Date of issue: January 2017, publication: Bank for International Settlements, Date of
issue: 7 October 2016, JEL classification: F3, F4, G1, ISBN 978-92-9259-023-9
(online).
P a g e 59 | 66
Bibliography:
 https://www.ijmra.us/project%20doc/Cover_Page/Cover_Page_IJMIE_July2_2015.p
df
 http://www.igidr.ac.in/pdf/publication/DP-2014-022.pdf
 http://www.iaeme.com/MasterAdmin/UploadFolder/IJMET_08_12_087/IJMET_08_
12_087.pdf
 https://econpapers.repec.org/paper/netwpaper/0908.htm
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2236201
 https://www.sciencedirect.com/science/article/abs/pii/S0888613X15001619
 https://www.bis.org/publ/mktc09.pdf
 https://www.sciencedirect.com/science/article/pii/S0927538X16300531
 https://www.sciencedirect.com/science/article/pii/S0275531916302161
 https://www.sciencedirect.com/science/article/pii/S0378437117304673
 https://epta.fia.org/articles/growing-body-hft-research-time-put-old-arguments-bed
 https://www.seattletimes.com/business/some-pros-and-cons-of-online-trading/
 https://wirc-icai.org/downloads/Algo-trading.pdf
 https://issuu.com/magnaforexsignals/docs/algorithmic_trading_-_executive_sum
P a g e 60 | 66
ANNEXURES
QUESTIONNAIRE:
This is a research related questionnaire on algorithmic trade which means traders could
use a computerized software to place their bid and keep investing in the stock market
without affecting their fulltime job. Your honesty brings value to this survey report.
1. Name: _______________________________________________
2. Age:
 Below 21
 Between 21-30
 Between 31-40
 Between 41-50
 Above 50.
3. Gender:
 Male.
 Female.
4. Marital Status:
 Single.
 Married.
P a g e 61 | 66
5. Occupation:
 Student.
 Employed.
 Self Employed.
 Full Time Investor.
6. Your Annual Income:
 Below 1.5 Lakh.
 Between 1.5-3 Lakh.
 Between 3-5 Lakh.
 Above 5 Lakh.
7. What is the percentage of savings you save from your income?
 Less than 15%.
 Between 15-30%.
 More than 30%
8. Where do you invest your savings?
 Savings Bank.
P a g e 62 | 66
 Fixed Deposit.
 Shares.
 Gold/Silver.
 Mutual Funds.
9. What is your investment pattern?
 Intraday Trade.
 Swing Trade.
 Long Trade.
10. You trade in stocks which give you:
 High Risk/High Return.
 Low Risk/ Low Return.
 Low Risk/ High Return.
11. How have you traded through Algorithm?
 On your own by designing your own software.
 By Help of Brokers.
 With the help of Third Party Algo traders.
P a g e 63 | 66
12. You trade using algorithm because:
 It eliminates Time Lag for placing orders.
 It minimizes skeptical Behavior.
 It allows you to trade with your day to day job.
 Other.
13. Can Algorithmic Trading be viewed as a helpful platform to balance your job and
trading needs?
 Yes.
 No.
14. Is there a need for creating awareness and giving guidelines about the benefits of
algorithmic trade?
 Yes.
 No.
P a g e 64 | 66
MAP OF AREA OF STUDY
Kalyan:
P a g e 65 | 66
Ulhasnagar:
P a g e 66 | 66

DETAILED STUDY ON TRADE'S TRANSITION FROM MANUAL TO ALGORITHMIC TRADE Final

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Detailed study on Trader’s transition from Manual to Algorithmic Trade

Chapter No.1 Introduction

Quantitative trading is a methodology employing advanced statistical techniques to make

Automated or Algorithmic trading is using computers to generate trading signals, send

HFT which is widely known as High-Frequency Trading is a special category of

1.2 What is Stock?

1.4 What is Online Trading?

1.5 Why Trade in Stock Market?

1.5.1 Eliminates the middleman:

1.5.2 Easy Accessibility:

1.5.3 Real-time monitoring:

1.5.4 Focused Investments:

1.5.5 Economical Brokerage:

1.5.6 Faster Transactions:

1.5.7 Informed Decisions:

1.5.8 Seamless process:

1.5.9 Better ROI:

1.6 HISTORY OF AUTOMATED TRADING: -

1.7 Setting Up of the Stock Exchange:

1.8 Growth of Stock Markets in the Twentieth Century:

1.9 The Start of Algorithmic Trading:

1.10 WHY GO FOR ALGO TRADING?

Algorithmic trading is known by various names such as automated trading, black-box

1.10.1 Human Emotions:

1.10.2 Accuracy and Speed:

1.11 ELEMENTS OF ALGORITHMIC TRADING:

1.11.1 Data is everything:

Algorithmic trading involves devising & coding strategies by analyzing the

 Speed and reliability of the trading platform.

1.12 LEARNING ALGO TRADING:

With the boom in technological advancements in trading and financial market

1.12.1 Step 1: Core areas

• Trading/Financial Markets Knowledge

1.12.2 Quantitative Analysis:

1.12.3 Trading Knowledge:

1.12.4 Programming Skills:

1.13 Ways to become an Algo trading professional

1.13.1 Getting started with books:

1.13.2 Free resources:

1.13.3 Step 2: Learn from Professionals/Experts/Market Practitioners:

1.14 Algorithmic trading strategies and Modelling ideas

1.14.1 Algorithmic Trading Strategies:

• Calculate 5-day SMA

1.14.2 Momentum based Strategies:

1.14.4 Statistical Arbitrage:

1.14.5 Market Making:

1.14.6 Paradigms & Modelling Ideas:

As mentioned earlier, the primary objective of Market making is to infuse liquidity in

1.14.7 Modelling ideas based on this Paradigm:

1.14.8 Statistical Arbitrage:

1.14.10 Modelling ideas

1.14.11 Machine Learning

1.14.12 Modelling idea

1.14.15 Arbitrage Algorithms

1.14.16 Technical analysis

Backtesting a trading strategy is a process of testing a trading hypothesis/strategy on

• Choose the market/ asset segment that one intends to trade.

Typical Backtesting Parameters to Evaluate a Trading System include:

What is an Automated Trading Platform?

An automated trading platform is offered either by the broker or by any independent

How to choose an Automated Trading Platform?

1.14.17 Programming Languages

Chapter No. 2: METHODS OF DATA COLLECTION