Program trading

Program trading is the purchase or sale of large numbers of stock shares based on price differences between the value of the stocks and the FUTURES indexes associated with those shares. The NEW YORK STOCK EXCHANGE (NYSE) defines program trading as any trade of $1 million or more in which more than 15 different stocks are bought or sold at once. In reality, program trading is conducted by computers “programmed” to automatically place orders whenever differences between stock-market indexes and their futures indexes create a PROFIT opportunity. Program trading is an electronic version of ARBITRAGE, the simultaneous buying and selling of ASSETS based on small differences in prices in different markets. Program trading began in the early 1980s with the creation of computerized trading technology. One of the criticisms of program trading is that it is something available only to large, market-trading companies. Initially the practice was used mostly by large brokerage firms and by HEDGE FUNDs. Recently MUTUAL FUNDS have expanded their use of program trading, representing the interests of their SHAREHOLDERS, who are often small investors. Another criticism of program trading is that it increases market volatility, adding large volumes of trades to the market as the market is rising or falling. As a Wall Street Journal article reports, “In practice, program trades often are much larger, with individual transactions routinely topping $100 million and some reaching $2 billion or $3 billion, often on behalf of WALL STREET’s biggest brokerage firms and INVESTMENT banks.” In one week in June 2002, program trades accounted for over 50 percent of trades on the New York Stock Exchange. (In 2002 program trading usually accounted for about 30 percent of all trades.) After the STOCK MARKET crash in 1987, the NYSE established trading curbs to reduce the impact of program trading. Under current rules, if the Dow Jones Industrial Average rises or falls 180 points, the NYSE requires all program trading to go against the trend in the market. This prevents huge buy and sell orders from exacerbating the market trend.
See also DOW JONES AVERAGES.