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      Ring Trading to Algo Trading—A Paradigm Shift Made Possible by Artificial Intelligence

       Aditi R. Khandelwal

       IIS Deemed to be University, Jaipur, India

       Abstract

      This chapter explains a framework which shows the transformations which took place in Indian stock markets and their working. Several year’s back the stock exchanges were physical places bussing with people and where everything used to happen manually by humans. The trades were executed by a process referred to as open outcry. Clients had to wait till the next day to see the high low prices of shares in the newspaper. The participation in stock market was low and selective.

      Then came the time when a boom in stock market came and people at large started investing with the coming up of brokers cum investor like Harshad Mehta but sadly now we remember him as a fraud. The stock market also saw a change in the working of exchanges. Systems started becoming computerized and one fine day everything shifted to internet-computer based systems called online trading. The latest scenario is where highly sophisticated computer based programmes called as Algorithmic trades came into force. These are trades which are totally human less and thus help in normalizing the trading, too high or too low is detected and stopped by auto cut off modes.

      Keywords: Stock market, ring trading, open outcry, settlement cycle, depository, algorithmic trade, stock exchange

2.1 Introduction

      Stock markets are the nerves of an economy and industry of any country. They are the intermediaries who move the savings from households into the main stream industry on one hand and on the other makes a common man part owner of big companies of the country and the world. Since the inception of stock markets which dates back to 1875 when “Native Share and Stock Broker’s Association”, India’s first share trading association was formed which later came to be known as Bombay Stock Exchange (BSE). It was created with just 318 members. Since then, stock exchanges and trading have gone through a lot of changes. If we see the broadest bifurcation of stock market generations, then it can be broken down into three major generations. The first was the era of ring trading, followed by the transformation period from ring trading to online trading based on sentiments and run by major few, and the latest which is even more neutral and runs on artificial intelligence (AI) algorithms.

2.2 Ring Trading

      Traditionally, rather I should say historically trading in the stock market used to happen in the trading ring which was physical areas in stock exchanges where the stock brokers used to stand and trade stock by open outcry. To understand it better, a ring is a location on the floor of a stock exchange where trades were executed in old times before internet came in our lives. Few renowned brokers used to enter the ring and shout out the orders placed by their clients; these were then sent to the record keeper of trades who would also keep a track of lowest and highest prices of each stock. Since the whole process used to be done manually, there was less efficiency and a lot of confusion as well [1].

2.3 Features of Generation 1: Ring Trading