Capitalmind Financial Services has said in a research paper that it would be difficult for retail investors to mimic the algo trading strategy of big players, such as foreign portfolio investors and proprietary traders
After a Securities and Exchanges Board of India (Sebi) study showed that big players reaped the majority of profits using algo trading in futures and options (F&O), portfolio manager Capitalmind Financial Services has said it would be difficult for retail investors to mimic the same strategy.
About 96 per cent of foreign portfolio investors (FPIs) and proprietary traders used algo trading to generate profits, the Sebi study had said.
Retail investors cannot easily employ algorithmic trading to reap profits because “algo trading mainly involves high-frequency trading, arbitrage, trend following, or other quantitative strategies. Though, the data shows that some individual traders who used algorithmic strategies also incurred losses overall,” Capitalmind Financial Services said.
It said that simply investing through an algorithm is not enough. The algorithm must be able to generate profit from market anomalies and inconsistencies.
Nihit Kshatriya, senior research analyst, Capitalmind Financial Services said: “Trading derivatives is a complex business. It’s not just the structure of instruments that makes it complex. It’s due to the unpredictable, erratic and random behaviour of the market forces. To trade in such products, in the even more complex environment of markets, a trader needs better expertise, institutional knowledge, experienced team, and technological edge to make money in this business.”
Key Findings Of Sebi Study
Here are the key findings of the Sebi study.
Loss Makers: About 93 per cent of individual F&O traders lost money in three years from FY22 to FY24.
On average, these loss-making traders lost about Rs 2 lakh per person during this period. The top 3.5 per cent of loss makers, approximately 400,000 traders, lost Rs 28 lakh per person, including transaction costs, on average. Brokerage, exchange charges, and other charges amounts to 25 per cent of their profit and loss (P&L). The capital size of loss-making traders did not make any difference in their losses.
Profit Makers: Only 7.2 per cent of individual F&O traders made a profit over the three-year period, and only 1 per cent of individual traders made profits above Rs 1 lakh after adjusting for transaction costs.
Other Data: About 94.2 per cent of F&O traders traded only in options. Around 5.1 per cent traded in both F&O. Only 0.7 per cent of F&O traders traded in futures alone and 5 per cent of them managed to generate profits in FY24, the Sebi study said.