The rise of Algo trading platforms & everything you need to know

Over the last couple of years, there has been a steep rise in the number of platforms that sell “algos” or programs that trade strategies automatically on a client’s behalf. Some of these platforms claim that their algos have generated extraordinary returns in the past and can do the same in the future — all you have to do is click a button. The first thing to remember is that there is no easy way to make money, and if something seems too good to be true, it probably is, and it will very likely cause you to part with your hard-earned money.

While these platforms still seem small in terms of revenue and users, the lure of easy profits can quickly make them grow bigger. A number of such platforms have also been using the names of brokers without their consent, including Zerodha’s, alongside their offerings. They have started attracting regulatory scrutiny. We thought this is an appropriate time to post an explainer with everything you need to know about algo trading and such platforms selling automated trading strategies.

What are algos?

In stock market terminology, algos or algorithms are software programs that can collect data for a trading strategy, backtest the strategy to see the P&L historically, and, if required, also automatically trade whenever the strategy generates a buy or sell signal.

For example, assume you have a simple strategy to buy a stock if the stock price goes above its 20-day moving average and sell if it goes below the moving average. If you don’t use a program, you will have to manually look at the charts to figure out the P&L of this strategy in the past and then track the charts for the buy and sell signals. Doing this manually is tough and almost impossible to scale since tracking beyond a couple of charts manually is impossible.

Instead, a program, or algo, can be used to do this automatically. A strategy can be coded using a programming language or with platforms that allow non-programmers to build strategies with zero or little coding. Such algos can be connected to a dataset to backtest the strategy across many stocks automatically. They could then monitor live market data and generate alerts whenever a buy or sell signal is generated, and with fully automated algos, even automate the order placement completely.

Fetching data (market data or order/position data) as an input to an algo and then placing an order automatically when trading signals are generated can be achieved in a couple of ways.

  • The hacky but the most prevalent way this happens is with “scraping” utilities that consume data by reverse engineering data flowing through broker trading platforms and push to tools such as Amibroker, Metastock, Python programs or Excel etc., as an input for the strategy. There is no dearth of third party automation tools that plug into these platforms to place orders automatically on a broker’s trading application, again, through reverse engineering, when a strategy gives a buy or sell signal. This is essentially using automation tools (sometimes called “macros”) to automate software running on a customer’s computer screen. Instead of a human user moving the mouse and clicking the buy or sell button, a program could simulate the mouse movement to click them. There are off-the-shelf products available to automate broker trading platforms, commonly called “bridges”.
  • The other way is by using machine-readable APIs (Application Programming Interface) if a broker offers them. Here, there is no reverse engineering involved. All interactions, for instance, programmatically pulling one’s own order and position books for analysis or placing orders in machine-readable formats, is via officially offered API channels.

Algos in the Indian context

If you are using algos to backtest strategies or generate manual alerts, the only regulation you need to be concerned about is the exchange data vending regulation. A brokerage firm is allowed to provide data only to their trading customers for free. If you consume data from any broker, you can’t republish this market data without exchange approvals. But if an algo is used to automate order placement completely, that is, there is no human involvement in clicking a buy or sell button on the screen before order placement, the regulations explained below come into play.

Algos offered by brokers

If a brokerage firm offers a discretionary algo (one that decides when to buy or sell based on a strategy) that is hosted and managed by the broker, the algo needs exchange approvals. This is applicable if the algo is used by the broker for their own proprietary trading (prop) or if it is offered to customers. When the broker offers such an algo, the algo or the program runs on the broker’s systems and not on the customers’. Whenever the algo generates a signal, an order automatically gets fired on the customer account with no human involvement from either the broker or the customer.

If the trading strategy is latency-sensitive or if the execution speed can help improve performance, such algos can run in the exchange colo (co-location). Typically, a brokerage firm runs the servers that host these strategies and their back-end execution management systems in their data centres that connect to the exchange via leased lines, which can reduce execution speed. But by being in the colo within the exchange’s infrastructure, algos can get a considerable speed advantage. Such strategies that are speed-sensitive and typically fire a lot of orders are called HFTs (High-Frequency Trading strategies). An example of HFT strategy is price arbitrage, where the price difference of a stock is monitored on NSE and BSE and at a certain threshold, sell on the exchange where the price is more and buy where it is less, and then reverse the trade as soon as the difference reduces. While the profit per trade can be pretty low, HFTs generally rely on large volumes of trades to generate returns.
By the way, when I talk about latency (delay in execution), internet-based trading typically is measured in milliseconds (1/1000th of a second) and on colo in microseconds (1/1000000 of a second). That is, the speed of order execution of an internet-based trading platform offered by a broker can be hundreds of times slower than an HFT running in a colo.

Having said that, such speeds are needed only for certain arbitrage or market-making strategies. Colo is also an expensive and complex setup, so retail investors rarely participate, and only institutions generally run algos inside exchange colo.

Algos offered by brokers need exchange approval. Today, exchange approvals involve an auditor carrying out checks to ensure that the risk management checks and order limit checks are in place. The reason for this is because these run at the broker’s end, and they carry a systemic risk, especially if they are HFTs. By systemic risk, I mean algos misfiring large orders that can cause large market movements or a large number of orders that can choke the exchange systems. Brokers aren’t allowed to offer such strategies to retail customers. The brokers who offer such algos require customers to become an authorised person or a corporate entity, create a dealer terminal with necessary approvals and only then allow automated trading. All orders that are placed through broker algos also get tagged as an algo at the exchanges.

Algos created and run by customers

Tech-savvy customers with programming knowledge have been automating their trades using automation tools from the time internet trading started. Any savvy computer programmer can easily build a utility that scrapes data from any broker’s web, desktop, or even mobile trading platform (essentially any software that runs on the client’s computers) and then use automation tools (macros) to place orders automatically at their discretion. It is impossible for a broker to find out if a customer is using automation tools on their computers or not, whether a buy or sell button was clicked by a human or a macro. However, anomalous activity can be detected, for instance, unusual patterns and rates of orders coming from a customer.

Zerodha (Kite Connect) and many other online brokers allow customers programmatic access via API to their own accounts. Tech-savvy customers can use these APIs to consume machine-readable data; for example, they can read their portfolios for analysis and place orders. Since APIs are meant for computer programmers primarily, unsurprisingly, less than 0.05% of our customers use APIs, and an even smaller fraction use them to place orders. API access to one’s accounts has been standard practice in developed markets for decades, although it is a more recent phenomenon in India.

As I said earlier, it is impossible to determine if an order from a customer was placed by them, someone on their behalf, or by a program running on their computer. Currently, regulations don’t recognise algos that run on customers’ computers. Even if there were regulations, it is impossible to regulate or enforce what customers run on their computers or whether a human or a program is clicking buy or sell buttons on a trading platform on a customer’s computer.

Risk of automation at a customer’s end

When a customer uses official APIs offered by the broker or third-party automation tools to connect to a broker’s trading platform, all the risk management checks that apply to the standard internet trading platform apply automatically. The interactions pass through the Exchange-approved Internet-based trading platform anyway, irrespective of automation. There is no systemic risk here. HFT-like behaviour is also not possible given the high latency of the internet compared to colo along with broker placed order rate limit checks. The risk here is limited to an individual customer making uninformed trading decisions with or without automation.

This is in stark contrast to algos that brokers host and run in their data centres or at Exchange colo, where there may be a systemic risk. In any case, the speed of execution of internet-based trading platforms makes automating using third-party automation tools or APIs infeasible for any strategies that are latency (speed) sensitive or need to fire a large number of orders.

A common misconception conflates algos with APIs. While algos are meant for trading, APIs are universal means to do machine-readable interactions with a system. For instance, there are popular portfolio analysis and tax reporting tools built on top of Zerodha’s Kite Connect APIs that help customers import their portfolio data and generate analysis and reports with a single click. This is a far more extensive use case of APIs than placing orders.

Algos offered by unregulated online platforms

As I mentioned in the beginning, we have seen a significant increase in platforms that offer off-the-shelf algos and strategies that claim to make profits over the last couple of years. This is in conjunction with the rise of unregulated financial platforms that also heavily advertise on TV and social media. Typically, these platforms show cherry-picked backtested returns and then give a one-click option to subscribe to a strategy and connect the algo to their trading accounts with many popular brokers.

In terms of market risk, these platforms don’t really bring any systemic risk. All orders, as I said earlier, typically go through the same risk management checks as manual orders, as these tools generally just latch onto a broker’s internet-based trading platform. But there are a few other risks that everyone needs to be aware of.

  • Concentration risk — If too many people subscribe to the same strategy and if the strategy fires automated orders on a large number of customer accounts simultaneously, this can potentially cause volatility in the markets, especially in contracts or stocks with low liquidity.
  • Strategy misfiring — These strategies are off-the-shelf programs offered by 3rd party vendors. The lure of one-click financial returns means there may be a large number of non-savvy users subscribing to these offerings. So for most users, this is a black box where you can’t see what is happening behind the scene. A program can face technical glitches that can get it to misfire orders causing losses for the customer. Since these are unregulated platforms, there is no easy legal recourse either.
  • Mis-selling risk — Today, such 3rd party algo platforms aren’t regulated. Backtested returns shown could potentially be manipulated to lure the customer. Even otherwise, backtested returns in many cases don’t consider the impact and trading costs which, if considered, can significantly alter the P&L. Since these strategies can potentially generate more trades and higher brokerage, there is also a risk of the employees of brokerage firms who have revenue targets luring you to subscribe to them without disclosing all the risks.

Zerodha’s stance

There has been an increase in the number of these 3rd party algo platforms popping up displaying our logos alongside other brokers. We DO NOT have any partnerships with any of these platforms which offer algos that can automatically trade on a customer’s behalf. If any of them claim to be our partners, they are misleading you. We have been actively asking these platforms to remove any ambiguous mentions of any sort of association with our brand from their websites.

In a technology first world, where we are constantly talking about commoditising access and products, API access or machine readability to one’s accounts should not be privy to a select few. Everyone who wants to should be able to get access to it. Currently, there aren’t any regulations around providing customers access to their trading accounts through APIs. Maybe it should be introduced so that there is no regulatory arbitrage. A simple example is (non-machine-readable) PDF contract notes that are essential for tax filing. Parsing and importing hundreds of such PDFs at the end of the financial year is exceptionally tedious and error-prone. We created machine-readable contract notes that can be imported into tax filing programs via APIs with a single click, a big benefit to our clients.

While there is no systemic risk that these algo trading platforms bring to the markets, they still create financial risks, the biggest one being mis-selling. These platforms may need to be brought under some regulations so that there is accountability. If unchecked, there is a risk of these platforms becoming large by mis-selling and not disclosing the risks, which can, in turn, cause losses to retail customers. The recent phenomenon of the rising number of advertisements for various unregulated financial products may be a sign.

Concerning regulations, I guess these platforms already come under the purview of the current RIA/RA regulations, especially because they collect a fee. RIA (Registered Investment Adviser if you are giving client-specific advice) and RA (Research Analyst) if the advice is for a group of customers. Subscribing to an off-the-shelf algo created by another person that generates a buy/sell signal is very similar to subscribing to a human who tells you when to buy or sell. These platforms probably fit better under the RA framework, which is easier to comply with as well. Explicit regulations will also help these platforms grow without the fear of any regulatory uncertainty.

The 3rd party automation tools that customers run on their computers can’t be monitored or regulated. It is also impossible to regulate or stop all automation tools (bridges) from being distributed for free or sold on the internet. While these may not bring any systemic risk, but platforms that use such bridges to sell automated trading strategies pose the risk of misselling and inducing investors to make poorly thought out trading decisions. They should maybe, like explained above, be brought under the RIA/RA ambit.

I just want to remind everyone once again that there isn’t an easy way to make money when trading the markets. While an algo will not be influenced by fear or greed like a human being, markets are super-efficient. If there is an algo or strategy that can make money, enough people will quickly spot it, and soon it stops becoming effective. Another downside of algos is overtrading. A string of 10 trades where you neither make nor lose money could still potentially lose you over 10% just in trading and impact and tax costs, which typically most algo platforms don’t consider when displaying their back tested returns.

If you are interested in coding your technical analysis strategies and backtesting and visualising the P&L without any programming knowledge, check out https://www.streak.tech (a Rainmatter portfolio company). It obviously does not automate order placements; only alerts are generated whenever the strategy generates a buy or sell signal.

If you decide to use strategies built by another person, remember to consider the risks involved and only allocate a small portion of your capital towards them. This is akin to listening to someone else’s financial advice.

Hopefully, this gives you a clearer picture of retail algos and to take better trading decisions.

Nithin Kamath

CEO @ Zerodha and partnering startups through Rainmatter to help grow and improve the capital market ecosystem in India. Love playing poker, basketball, and guitar. @Nithin0dha on Twitter. | Personal website: https://nithinkamath.me

46 comments

  1. Kiran Rao says:

    Thanks a lot for this explanation. I was confused how some of these platforms are also mentioning NSE and BSE as their partners.

    • M Pandiarajan says:

      Hi My name is Pandiarajan long time zerodha customer founder of quantman.in(full backtest platform in options(including stock and index options) do it for your own kind of platform,we are working on one click order execution.If regulators taking steps like mentioned in your article clearly helps us remove uncertainty for future business direction..you clearly mentioned fully automated as a platform we can not do.can not do order confirmation via phone call or through telegram?can we get order confirmation for both entry and exit?because there is high chance users may not see notifications and missed exit orders.

  2. Ravi Kiran says:

    This article has answered all the questions I have had on this subject for a long time now. Also thanks for highlighting that there is no easy way to make money in the markets. It is so tempting when someone promises to make you quick money.

  3. Prashant Kulkarni says:

    Thanks for explaining in detail about ALGO Trading Platform.

  4. harsh says:

    The simple question ,your admission is worthwhile for API use , tradtron is doing in best way in india , Nitin streak world allow api integration in usa …………………can streak tech allow same here in india

    • As I have explained, a broker or a platform offering automated trading strategies is most likely a violation of exchange and/or RIA/RA regulations. Streak can’t offer automation unless there are explicit regulations that allow them to. There are no such regulations when trading on international markets.

  5. Chandrashekhar says:

    Hi Nithin- zerodha charges 2000 for apis per month. Similar apis are available for free with other brokers. 2000 per month is big amount for small retail traders. I personally shifted some of my capital to other borker account so that I can execute few developed intraday option strategies. Pls see if this can be made free in zerodha atleast for ppl with less than 25 L capital (I am sure you will still get brokerage from the orders placed through coded app :)) as I love everything else that zerodha offers.

    • Rajesh says:

      Yes, I agree many are providing it free. Atleast it should be given free for people who is generating minimum of Rs. 2000 as brokerage to you per month.

    • As I have explained in the post, we think using APIs is a risky proposition, especially in a world where everyone is trying to sell automated trading strategies claiming to be making a lot of money. We don’t want our APIs to become a mass retail product. The pricing is intentional to ensure that this doesn’t grow too large and is used only by those who are certain trading capital and above, even though it is not good for the business.

      • Amit says:

        Nithin,

        As you say, APIs can be useful for mundane things such as collating tax data.

        Perhaps, APIs could be separated so that ready-only data related to our transactions for the purpose of filing taxes and record keeping could be made available free or cheaply.

        APIs to execute orders automatically could still be behind a paywall.

      • Chandrashekhar says:

        Thanks for the response Nithin. That’s a good intention. I understand trading is risky but fail to understand how manual trading is better compared to trading by setting some rules through program.

  6. Manoj says:

    Hello Nithin bhai,

    I have a business idea, still on paper though, which facilitates the trading process (it’s not Algo, and in no way it generates any buy sell signal or places any order itself, just facilitates the trading)

    I spoke to one of your team members but it seems I wasn’t able to convince them about the same due this Algo and Auto trade system already in market.

    They seem to be concerned about some regulations due to their experience of these systems which are using scrapping ..

    It would be great to connect over an email or a phone call and discuss this idea and if it sounds good to go !

    Would be great to hear from you

    Cheers !

    Manoj

    • Hey Manoj, if you are building public platforms by scraping data from Kite or any other broker platforms, it is a violation of exchange regulations. We would definitely say no to any such business idea. If your idea is around social trading, I have explained here why it isn’t viable. Do check this post: https://zerodha.com/z-connect/rainmatter/stock-trading-games-copy-trading-platforms-in-india. If the idea is something different to this, email [email protected]

      • Manoj says:

        Thanks for your response Nithin Bhai,

        No, I am not looking at scrapping .. when we were working on Airline products in 2007-08 we tried scrapping, while we found out that the same was not appreciated it was too tedious task to keep monitoring the main website and be alert on any single change as that would impact the application and even result in errors.

        Our approach is very simple and straight forward, Futuristic, in complaince with the local laws and governing agencies, no reverse engineering, simple and plain code which should be scalable anytime as per need.
        there are many grey areas, so we are cautiously trying to figure out the right context and right + acceptable workings of the proposed system.

        We arent looking at any Algo or Automated process, nor do we wish to become a parallel system to what you have or an advisor.. we are just trying to build a setup which will assist a user to trade in more simplfied ways (while Zerodha is doing Simply fantastic so as many others) yet we found that there is still some scope, our proposed application is very much having a human touch and unless a user clicks and then confirm it will not place any order.

        Had a discussion with your team at rainmatter and I trust I wasnt able to clarify what we intend to do and also that this is niether Algo Nor Automated Trading system, I am sure they are still under impression that we were trying to build some algo system or some autotrader.

        Thank you for your time 🙂

        Cheers !

        Manoj

  7. Dinesh jadhav says:

    Sir, when new features are adding in web platform kite 3.0?

  8. Mahesh V says:

    FNO is Zero sum game and Automation alone cannot win at all times. Retail Traders who like to have the Trading edge may go the Keeping It Simple & Straight (KISS) route. Day traders with experience probably get to know when these tools are let loose!

  9. Karthik says:

    I am using Mintfox’s algo trading services and they are quite good.consistently generating around 5-7% monthly
    decent returns for me

  10. Karthikeyan Venkatraman says:

    Is it possible to include API access to streak subscribers?

  11. Sam says:

    The reason for very low number of people using Api on your platform is because of your high Api charges where others are offering free. I stopped using zerodha the day they increased their brokerage.

    • Sam says:

      To earn 2000 from Api’s, they have actually lost tens of thousands of customers who have shifted to other brokers.

      • Manoj says:

        as a one time fee of 2000 is still fine, but they are charging 2000 per month and thats way too much.

        may be that is why their API users are far too less

        • Just answered the same above: As I have explained in the post, we think using APIs is a risky proposition, especially in a world where everyone is trying to sell automated trading strategies claiming to be making a lot of money. We don’t want our APIs to become a mass retail product. The pricing is intentional to ensure that this doesn’t grow too large and is used only by those who are certain trading capital and above, even though it is not good for the business.

          • Manoj Lahoti says:

            Appreciate your thoughts .. specially “even though it is not good for the business”

            Agree to some extent that over exposer could be harmful and Yes, there are n number of ppl trying to sell thier MoneyMinting Algo softwares but not all are looking at algos.

            I am sure one fine day i will be able to pitch it right and get access to your APIs 🙂

            Best wishes,

            cheers !

            Manoj

      • Sachin says:

        Zerodha actually saved tens of thousands of customers from mis-selling. Not many retailers can code. People who are selling these algo’s can promise them anything with disclaimer and later back-off. These 2000 rupees make one think at least once about what they are getting into, also minimum 2000 rupees profit has to be there from those algos to retain clients.

        And if one is confident enough about their trading system, 2000 rupees is nothing.

  12. Rajesh Patodia says:

    Zerodha is talking like they are guaranteeing all their retail traders that don’t use algos are making money. It’s a open public market. People will use all the tools at their disposal to better their opportunities, algos are just one more tool. Before these platforms we had to deal with cumbersome code and manage a lot of data. These companies reduce the burden and allow retail users to truly trade. Jaal ne ki boo aaa rahi hai

    • Hey Rajesh, I guess you know that if trades are executed on these platforms, brokerage revenue is generated for us. So these algo platforms getting clients to trade is not bad for us or any other broker. What is shared in this post is risks that everyone should be aware of.

  13. Srinivasrao guruprasad says:

    Wonderful eye opener article on algo trading.

  14. Nitin Bhaskar says:

    I personally think Pi was an excellent software. Any reason for killing it Nithin?

    Regards,
    Nitin

  15. Rahil Bhansali says:

    Think there are certain other non-regulatory risks you should highlight:

    1. Nobody knows the volumes such strategies can handle or even if these 3rd party vendors are simulating trade execution correctly keeping a check of volumes against a trade price. In short, we do not know if the strategy scales.

    2. Slippage costs when a lot of people use the same strategy together.

    3. Are they accounting for the impact of dividends and stock splits in historic data?

    4. Are they prioritising certain trades or is it FIFO?

    5. What their failovers are to limit downside?

    ————-

    On another note –

    1. would love to know if there is any regulation preventing brokers from using order flow data they collect from their retail platforms for their prop desks?

    2. Can brokers sell order data in india? Similar to Robinhood in the US – believe they could.

  16. R_Paul says:

    @Nithin Question on this — //Even if there were regulations, it is impossible to regulate or enforce what customers run on their computers or whether a human or a program is clicking buy or sell buttons on a trading platform on a customer’s computer.//

    Can Zerodha(or any broker) tell between manual/macro orders and orders placed via API?

  17. Anand says:

    Which platforms available like fox trader algo & how to get zerodha delar terminal what we required

  18. Pulkit Gupta says:

    Getting philosophical, is it unrealistic/far-fetched to say that all trading on retail side can be replaced by such automation in future?
    How about current results of this kind of scrapping v/s other kinds of trading/investing approaches? If algo trading is indeed beating everyone else, are we looking at a scary future where we would just buy a program & let go of all the fun in it?
    P.S.: in later case, as you touched a similar topic earlier, if all of them are using same strategy, it can cause volatility & misselling.

  19. Anand says:

    A few questions arise, which doesn’t lead me to a healthy thoughts. But please clarify this
    “If it is such a supine play ground, why zerodha lead everyone here?”

    I believe zerodha is the fore runner in API, every other brokers are following you just to fill the gaps in demand that you created.

  20. Sachin Agrawal says:

    A great article describing Algo trading. Thanks for this.
    Did you also publish something that compares US/European regulations with that Indian on the similar lines you have explained algo trading in this article?

  21. Pranav Mittal says:

    Very insightful article.

    As the founder of pythonstraddle.tech, a next-generation algo trading platform, I totally share your concern about the lack of regulation for algo trading platforms.

    We are trying our best to educate customers and help them make informed choices, and hoping that SEBI will soon look into procedures and regulations for algo trading facilitators.

  22. Jaidip says:

    Nitin, you are doing a great service to the investing community and to India by sharing your knowledge and tools. God bless you and your entire team, may you all continue to grow and contribute to society.

  23. Arun Bhatt says:

    In one way Zerodha is also responsible for bringing many retailers to stock market because of inventor of discount trading. Now once there are lot of retailers in trade market, algo trading is next step in journey which was earlier limited to big trade houses only. It is a way to take profit away from these big trade houses and give it to retailer. I do not understand why you have not written a big article on a lot of tip advisers who charge a hefty money for providing a tip without any basis and which causes big loss to small retailers. Algo trading is a way to execute the same strategies again and again and because the stock market is a number game, If you keep doing the same thing again and again then only you make profit. If you keep changing the direction then you are big loser. Earlier retailers used to be biggest losers in stock market and the winners used to be the big sharks in here. The big traders as we know are the big sharks which loot money from the small retailers and become millionaire/billionaire as stock market is zero sum game. Algo trading is a way to distribute that money back to retailers.

  24. H.S Adhikari says:

    Sir,
    From yesterday 15/10/21 Zerodha Kite/position is not opening. Is there any problem. My account id is YC2546 and mobile No. 9936629436. Thanks

  25. Manoj says:

    Which geography should one host their client side application to have least latency with Zerodha/Kite api?

  26. Jatin patel says:

    This is like enforcing your views and trying to become unnecessary Robinhood. I want to experiment ,I wan to learn , I want to try putting few order via Algo. I wan to backtest just for education. Still , pay 2000 ? That’s bad

    If someone tells you” hey you can’t use computers to trade because it’s risky. You can just click and buy/sell. Prone to irrational decisions. Call us old way and trade . We want to save retail” . How absurd this sounds. You are doing same with Algo.

  27. George says:

    Need contact details..

    My no 9384238858

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