In today’s world, everything is information—whether it’s our social media feed overflowing with updates from friends or the complex streams of financial data flowing through stock markets. And where there is information, there is opportunity—opportunity that can often be elusive without the right tools to capture it.
Consider this. You’re scrolling through Instagram, you see your friends vacationing in Goa, and within seconds, you’re booking tickets to join them. The information you absorbed created a spontaneous opportunity.
However, in the financial world, people are not looking to spend money—they’re looking for ways to make it. Nonetheless, just as opportunities for a spontaneous trip may go unnoticed, so do many of the financial market opportunities, unless we have the technology to uncover them.
This is where algorithms come into the picture.
Understanding algorithms
What is an algorithm? Let’s simplify it.
An algorithm is a set of step-by-step instructions designed to perform a specific task or solve a problem. It can be likened to the nuances of a given problem, guiding you through a series of actions to achieve a desired outcome.
For example, there are algorithms that make your train schedules. These algorithms determine the optimal arrival and departure times for trains at various stations, taking into account factors such as track availability and potential conflicts with other trains. Schedule-generating algorithms create feasible schedules that minimise waiting times and ensure smooth transitions between track segments.
The power of algorithms lies in their ability to process vast streams of data, far beyond what human eyes can grasp.
How algorithms work in financial markets
Traditionally, institutional investors have heavily relied on algorithmic investments to bring greater efficiency in evaluating financial markets and executing trades. Take, for example, the advanced systems used in the United States, where hedge funds analyse satellite imagery of parking lots outside retail stores to estimate quarterly sales or where algorithms scan credit card transactions, social media sentiment, and even the tone of CXO speeches in earnings calls to predict stock performance. It sounds futuristic, but it’s happening right now.
How retail investors can benefit from the efficiencies of algorithms
Financial markets, at their core, are driven by the human emotions of fear and greed. These emotions lead to irrational decision-making and, more often than not, retail investors suffer.
A study by Sebi show that over 90% of retail traders lose money in the markets, and one of the top reasons is that a single bad trade can wipe out an entire account. Greed often clouds judgement, pushing people to risk more than they can afford on one investment.
This is where algorithms come in. Unlike human investors, algorithms don’t get swayed by emotions. They are unbiased and disciplined risk managers. By operating without bias, they make decisions based solely on data, leading to risk-adjusted returns that outperform those of the average investor.
Algorithmic investing offers several benefits beyond providing unbiased judgement, significantly enhancing the investment process.
Key advantages include:
- Data-driven decisions: Analyses vast amounts of data quickly, identifying patterns humans might miss
- Speed and efficiency: Executes trades rapidly, capitalising on brief market opportunities
- Back-testing: Allows strategy evaluation using historical data before real-world deployment
- Risk management: Automatically adjusts positions based on market conditions and risk thresholds
- Diversification: Manages multiple assets simultaneously, spreading risk across various investments
- Accessibility: Simplifies investing for novices through guided algorithm-based platforms
These advantages make algorithmic investing a powerful tool in modern financial markets, enhancing decision-making and potentially improving investment outcomes.
The next frontier in India’s investing landscape is the empowerment of retail investors with the tools and strategies previously only available to hedge funds and institutions. By leveraging these professional-grade algorithms available to retail investors today, they can mitigate their risks, avoid emotional biases, and tap into opportunities that were once impossible to detect.
The future of investing in India is not just about access to markets—it’s about access to information and the technology that can transform that information into opportunities.
The author is Co-founder & CEO of Stratzy, a financial advisory platform.
