Algo trading- culprit for Friday's sell off.
what is algo (algorithmic) trading?
A trading system that utilizes very advanced mathematical models for making transaction decisions in the financial markets. The strict rules built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price. Large blocks of shares are usually purchased by dividing the large share block into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased.
Who are using algo trading?
The use of algorithmic trading is most commonly used by large institutional investors due to the large amount of shares they purchase everyday. Complex algorithms allow these investors to obtain the best possible price without significantly affecting the stock's price and increasing purchasing costs.
How it impacted Indian market on Friday?
A broker, who watched the freak deal closely, said during those few moments a staggering three million Nifty positions were created which was about 33 per cent of an average open interest of one crore limits.
The Sensex fell to an intra-day low of 17,231 points and Nifty 50 of NSE fell steeply by over 100 points within seconds. Similar trade took place in Infosys futures, when within seconds the share fell by 19 per cent below Thursday's closing of Rs 1,950. The markets did recover after “the mistake” was detected, but investors suffered apparent loss of anything between Rs 25 and Rs 50 crore in those few seconds.
The National Stock Exchange has said it would probe the freak trade, but brokers, who do not want to speak openly against the state-run exchange, apprehend no truth will ever come out. A section of middle-level brokers have raised question over alleged unauthorised use of algorithmic trade format by few influential brokers
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