A Look Back: By the Power of Algorithms!

WHY WE DID THE STORY: May 6, 2010, is a date that most traders will never forget. Around 2.42 p.m. (New York time), the Dow Jones went into free fall. In about five minutes, it plunged 573 points. Ten minutes later it rocketed back 543 points. Everybody blamed the computers. The press in India was flooded with articles by many CEOs of finance and broking companies stating that computers were the enemy of financial markets. It was also the time when some of the biggest players in stock market algorithms started visiting Indian exchanges and Indian brokers as the Securities and Exchange Board of India felt the need to modernise Indian stock exchanges. There was a conflict between those who believed in technology and those who didn’t. We figured there was clearly more to the algorithms than what met the eye. Since 2008, foreign institutional investors have been allowed to use the direct market access system to trade in India from outside the country. What was a one-off operation in 2008 has grown into a trend today.

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WHERE THE STORY STANDS: In the past few months, brokers have moved on to write their own proprietary algorithms. They understand that they need to have an edge to trade the complexities of the derivatives market. In the near future, domestic institutional players will also move in for direct market access as costs come down. Brokers are working towards it. Algorithmic trading is not a science fiction phenomenon anymore. It might lead to market crashes and other problems. But over the years, computers will take some of the biggest decisions in financial markets. Hopefully, human beings will still be a part of it.