The New World of Investing

Letter from the Editor: There's no getting away from the fact that algo trading improves liquidity and makes markets more efficient. And that's good news for small investors

Published: Sep 10, 2010

There’s always been a seductive charm around the battle between man and machine. Take for instance, Viswanathan Anand, who was on our cover in July. The clash between computers and world chess champs like Anand have always been of epic proportions. Today, technology has progressed so much that millions of chess games have been codified and mapped. Yet, humans have continued to retain their hold on the game that sophisticated supercomputers are still unravelling.

mg_34442_cover_sep_280x210.jpgNow, it is the turn of the stock markets. Around the world, a new breed of financial firms is threatening to change the old order. Armed with complex algorithms loaded on their computers, they are able to execute trades based on information received electronically at lightning fast speeds well before human traders can even make sense of the information. Today, more than 80 percent of all stock trades in the US and UK are driven by these automatic programs.

Today, algorithmic trading is all set to take off in the Indian stock markets. Global software firms are here to hawk their wares. Away from the public eye, a long list of small prop shops, foreign institutional investors, large brokerage houses and stock exchanges are all gearing up for a massive build up of volumes in high frequency trading.

From time to time, algo trading, as it is called, has spooked markets and confounded regulators. As trades increase, regulators like the FSA in the UK have been quick to point out the greater risk of systems failure. Yet there’s no getting away from the fact that algo trading improves liquidity and makes markets more efficient. And that’s good news for small investors. So will the Indian experience be any different? And once the programs take over, will there still be room for individual investing brilliance?

Forbes India unleashed its very own quant jock: Associate Editor Pravin Palande, to help us make sense of the changing landscape, and the new ground rules of investing. Volumes are all set to explode — and it may not be too long before machines take over much of the trades in India, reckons Pravin. “India may soon become one of the biggest markets in the world by volume. Although the US markets are well ahead, it may not take too much time for us to play catch up,” says he.

Hope you enjoy his cover story on this quiet revolution in the markets on page 54.

(This story appears in the 24 September, 2010 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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