The word ‘algo trading’ raises the hackles of most investors in stock market, as it evokes images of evil traders crouching before their trading machines and creating software that wreak havoc in the exchange trading system.
Wednesday, when the Sensex tanked over 700 points and the Nifty more than 220 points, saw most media sites carry the headline that algo trading had caused the market crash. Well, it might have made for an interesting read but was far from the truth.
The fall seems triggered by a buyer capitulation caused by the indices caving in once again on Wednesday morning, leading to a flood of sell-orders. The crude oil prices moving higher, rupee weakening and FPIs selling in the previous session could have combined to affect sentiment further when market opened.
The argument used to attribute this to algo trading was that the algo programs would have triggered a concerted sell in the market today causing a sell-off. The trading algos typically use parameters such as the 200-day moving average to trigger an automated sell. If the Nifty moves below this average, the sell could be triggered. But it may be recalled that the Nifty had closed below the 200-DMA on April 27, the day the index lost 92 points. There was no other major technical parameter that was breached on Wednesday that could have sent algos into an over-drive.
According to market sources, there is no report of any rogue algo program that went berserk on Wednesday either. It, therefore, appears to be just another tale of much ado about nothing.