In this article, we will discuss
- A Brief Overview of the Indian Stock Market
- Technological Growth in the Financial Market
- Push in Derivative Trading
- What role is technology playing in the development of derivatives trading?
- Enhanced Globalisation
- Volatility and its Management in Options Trading
There was a time when options trading was not even a thing in stock markets. If you go two decades back, investments in stocks took place manually. People actually visited a stock exchange in person to exchange the stock certificates and the money.
However, with the introduction of the Screen-Based Trading System (SBTS), everything is now taking place digitally. With the introduction of stock investment apps, we have even eliminated the need for an investor to physically visit the exchange to place their orders.
Now, most of us are aware of the basics of how the market functions. However, this blog is for those inquisitive minds and tech-savvy traders who want to know what’s coming next.
So here we are, to quench your thirst and tell you how the future of options trading is shaping up.
A Brief Overview of the Indian Stock Market
Before we proceed further, it is essential to understand the legacy of the Indian stock market. It will also help you to understand the direction in which it is growing and the future trends that you can expect.
Stock trading in the stock market started with the setting up of the Bombay Stock Exchange 135 years ago. Back then, the market operated with the usual outcry method, which was not only chaotic but also very cumbersome.
Online trading in India was first introduced by the National Stock Exchange (NSE), which was later followed by the Bombay Stock Exchange (BSE) as well.
Fast forward to the present times, the Indian stock market is considered one of the best-performing stock markets in the world. In terms of trading volume, NSE is the third-largest stock exchange in the world and is also the second fastest-growing exchange.
Technological Growth in the Financial Market
Analysing the future of options trading cannot start without discussing the technological advancements in this sector. This reform started with the introduction of electronic trading, which paved the way for numerous trading applications and brought the stock market to your fingertips.
These trading platforms use software applications that allow every trader to access the financial markets as and when they need.
Over time, the platforms have integrated various features, tools, real-time market information, feedback and a lot more to make trading easier.
Use of AI
Another significant impact is the technological advancement of Artificial Intelligence or AI in these trading platforms. By incorporating AI into these software applications, developers have enabled the platforms to learn from real-time market events and provide personalised feedback to the traders.
This is expected to continue to improve in the near future as well. Implementation of algorithmic trading for the automation of trades has eliminated various middlemen from the process and brought trading platforms directly to the traders.
Implementation of Blockchain
Another major innovation is the introduction of blockchain to trading platforms. For those who are unaware, it is a decentralised public ledger. Its primary purpose is to record transactions across the network and keep the process transparent.
Another advantage here is that no one can alter a transaction recorded in the blockchain unless they alter the entire block of information on the network. It helps traders carry transactions that are not only transparent but also highly secured. As this technology grows, it is very likely going to eliminate various other intermediaries from the entire trading process.
While the innovation of technology has been leading options trading to a pathway of growth, it also comes with its own set of risks and rewards.
- a. It has allowed users access to real-time market data.
- b. Elimination of intermediaries has also led to cost-cutting, thus making the entire process much cheaper.
- c. You don’t need to visit the stock exchanges physically anymore. Neither do you need to rely on the outcry method anymore
- d. System failure and data breaches are major risks that can cause humongous losses to traders as well as the entire stock market.
Push in Derivative Trading
Derivative trading in recent years has witnessed a significant rise in terms of volume. Improvements in automated trading algorithms and High-Frequency Trading (HFT) have further accelerated its growth.
For the unversed, derivatives are a type of financial instrument that derive their value from their underlying asset. Examples of derivative trading include futures and options, where these contracts derive their value from either another share, currencies or commodities.
Traders leverage F&O trading to either speculate the price of an underlying asset or form a hedge against its price volatility. A major benefit of using derivative contracts in trading is that it allows a trader to take a larger position in the market without having to invest an equivalent sum upfront.
What role is technology playing in the development of derivatives trading?
The implementation of different technological aspects has been affecting derivatives trading in numerous ways. For example, usage of AI, algorithmic trading, and advancements in electronic platforms have shown their impact. They have contributed to improving the speed and efficiency of the princess.
HFT has enabled traders to execute trades of very large volumes at super fast speed. Hence, traders can now take advantage of even the most minute price discrepancies in the market.
Trading platforms like the New-Gen Samco trading app offer personalised trading recommendations for traders based on their past trading behaviour. This has been possible with the use of cutting-edge technology and artificial intelligence to evolve the platform.
Leveraging such information has allowed traders to identify profitable opportunities and leverage risks in a much more systematic manner. It has eased the entire technical analysis process so that they can make informed decisions before opening a position in the market.
Derivatives trading is presently on the rise in the market, and it shall continue to soar higher in the future. It is important to see what direction it takes in its growth. However, irrespective of its growth, it shall continue to be on the complex end of the market, and traders must always use caution when trading in it.
Globalisation has played a crucial role in eliminating geographical boundaries when it comes to the options market. With rapid expansion and the aid of technology, investors have started tapping into the potential of international financial markets to increase their wealth.
Options trading has become a means for investors to get exposure to the stock market across borders and leverage their potential without actually having to invest in them. Financial institutions and multinational corporations have been using options trading to mitigate risks associated with currency exchange, interest rates, commodity prices, etc.
It is because traders have gained access to international markets now, that we have seen such a strong push in derivatives trading. Trading in international markets helps them make extra profits due to factors like currency devaluation, volatility, etc.
Volatility and its Management in Options Trading
Trading in options has become one of the most impactful methods to manage volatility in the stock market.
- Since it gives the holder of the contract a right to buy or sell the underlying asset at a specified price at a specified time, it gives them more power in managing their risks. This power, however, is not available when it comes to other financial instruments.
- Options trading also allows traders to make profits in both a rising market as well as at times when the market is falling. You can use one option contract to hedge your position for another options contract.
- It is all thanks to technological developments that it has now become so easy for traders to trade volatility in the stock market. As the innovations continue to improve, trading algorithms shall become even more sophisticated.
- Traders can now easily open a position from the comfort of their own homes, automate their strategies and leverage the real-time information and happenings of the market to their advantage.
To be able to leverage the financial markets to its best use, it is imperative to stay tuned to all the changes taking place. Not just options trading, but there have been significant changes in every financial instrument over time.
New instruments, such as exchange-traded funds, over-the-counter derivatives, credit default swaps, etc. have also seen significant growth. Currency trading has become so much easier with increasing globalisation and growth in the technological sector.
If you are an options trader, it is important you keep an eye on how the markets are functioning to understand what impact these changes will cause. With the introduction of AI in the picture, automation facilities, new analytics tools, and even trading strategies are evolving rapidly. This affects the overall trends in the market and, thus, by extension, your returns too. What we have discussed is just a glimpse of how these reformations are renewing the options trading, but there is still a lot more to see.
Frequently Asked Questions
Q1. What is the outcry trading method?
Ans. The outcry trading method is where both the stockbrokers and traders are present on the stock exchange trading floor. Even though now an obsolete method, it required the interested parties to shout and use hand signals to communicate their buy and sell orders to the professionals present.
Q2. How did the options trading start?
Ans. The rise of options trading can be traced back to ancient Greece in 332 BC. A man named Thales made a fortune of money by buying the right to buy olives even before they were harvested.
Q3. What are cryptocurrency derivatives, and how are they affecting options trading?
Ans. Cryptocurrency derivatives are financial contracts in cryptocurrencies such as Bitcoin, Ethereum, etc. Popularity of cryptocurrency has given traders the push to speculate on and hedge against the price of cryptocurrencies by using instruments such as futures, options and swaps.
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