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Should we blame the fall of the market on algo operations?

As the world market crashed and “entered bear territory”, many market men took the blame on pre-programmed trading or automatic trading using various algorithms, known as “algo trade”.

All over the world, even in the so-called developed markets, trading was interrupted on some occasions last week, as the reference indices reached the prescribed lower circuit. In India too, for the first time since 2008, negotiations were stopped on Friday, but rebounded sharply after negotiations resumed later.

What is algo trade?

Algorithmic negotiations are orders executed on the exchange platform by computer, without much manual intervention through a program designed by the investor. In India, algo exchanges were introduced in 2009. Since then, they have seen a sharp increase in interest from large domestic and foreign institutions, which trade in proprietary books.

Currently, around 40% of transactions are done through NSE-based algorithm trading.

Some algo operations involve manual intervention, but large investors mainly use zero-touch algae, which use pre-established technical levels (such as moving averages, RSI, etc.). Fundamental / quantitative indicators (profit margin, P / E ratio, EPS, etc.) or arbitrage opportunities (between futures and spot price) on the market. The main reason why they use zero-touch algo trading is that it eliminates the emotional quotient of the operators and therefore the execution of the exchanges will be without prejudice.

So, can algo operations influence the direction of the markets? If it is believed that a large series of predetermined orders could trigger the sale of panic, there would always be an army of counterparty algae, which would resort to aggressive purchases through scheduled operations. This should indeed act as a counterweight to aggressive selling. Furthermore, none of the exchanges indicate any systemic risk in the recent autumn. This means that execution went smoothly for both sellers and buyers, going against the theory of unilateral algo trade triggered sales.

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This recent sell-off is mainly due to the fear of a coronavirus business loss and nobody knows how long and long it will be and will impact the economy. Virtual bans on business meetings, travel, visits to shopping centers, etc. They will have far-reaching consequences. And that fear is real, and therefore the great fall.


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