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<title>Program trading</title>

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<span id="openzim-page-title" class="mw-page-title-main"><span class="mw-page-title-main">Program trading</span></span>

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<p><b>Program trading</b> is a type of trading in <a href="Security_(finance)" title="Security (finance)">securities</a>, usually consisting of baskets of fifteen stocks or more that are executed by a computer program simultaneously based on predetermined conditions.<sup id="cite_ref-1" class="reference"><a href="#cite_note-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup> Program trading is often used by hedge funds and other institutional investors pursuing index arbitrage or other arbitrage strategies.<sup id="cite_ref-2" class="reference"><a href="#cite_note-2"><span class="cite-bracket">[</span>2<span class="cite-bracket">]</span></a></sup> There are essentially two reasons to use program trading, either because of the desire to trade many stocks simultaneously (for example, when a <a href="Mutual_fund" title="Mutual fund">mutual fund</a> receives an influx of money it will use that money to increase its holdings in the multiple stocks which the fund is based on), or alternatively to <a href="Arbitrage" title="Arbitrage">arbitrage</a> temporary price discrepancies between related financial instruments, such as between an index and its constituent parts.<sup id="cite_ref-3" class="reference"><a href="#cite_note-3"><span class="cite-bracket">[</span>3<span class="cite-bracket">]</span></a></sup>

</p><p>According to the <a href="New_York_Stock_Exchange" title="New York Stock Exchange">New York Stock Exchange</a>, in 2006 program trading accounts for about 30% and as high as 46.4% of the trading volume on that exchange every day.<sup id="cite_ref-4" class="reference"><a href="#cite_note-4"><span class="cite-bracket">[</span>4<span class="cite-bracket">]</span></a></sup> <a href="Barron's_Magazine" class="mw-redirect" title="Barron's Magazine">Barrons</a> breaks down its weekly figures for program trading between index arbitrage and other types of program trading. As of July 2012, program trading made up about 25% of the volume on the NYSE; index arbitrage made up less than 1%.<sup id="cite_ref-online.barrons_5-0" class="reference"><a href="#cite_note-online.barrons-5"><span class="cite-bracket">[</span>5<span class="cite-bracket">]</span></a></sup>

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<div class="mw-heading mw-heading2"><h2 id="History">History</h2></div>

<p>Several factors help to explain the explosion in program trading. Technological advances spawned the growth of <a href="Electronic_communication_network" title="Electronic communication network">electronic communication networks</a>. These electronic exchanges, like <a href="Instinet" title="Instinet">Instinet</a> and <a href="Archipelago_Exchange" class="mw-redirect" title="Archipelago Exchange">Archipelago Exchange</a>, allow thousands of buy and sell orders to be matched very rapidly, without human intervention.

</p><p>In addition, the proliferation of hedge funds with all their sophisticated trading strategies have helped drive program-trading volume.<sup id="cite_ref-6" class="reference"><a href="#cite_note-6"><span class="cite-bracket">[</span>6<span class="cite-bracket">]</span></a></sup>

</p><p>As technology advanced and access to electronic exchanges became easier and faster, program trading developed into the much broader <a href="Algorithmic_trading" title="Algorithmic trading">algorithmic trading</a> and <a href="High-frequency_trading" title="High-frequency trading">high-frequency trading</a> strategies employed by the investment banks and hedge funds.<sup id="cite_ref-7" class="reference"><a href="#cite_note-7"><span class="cite-bracket">[</span>7<span class="cite-bracket">]</span></a></sup>

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<div class="mw-heading mw-heading2"><h2 id="Program_trading_firms">Program trading firms</h2></div>

<p>Program Trading is a strategy normally used by large institutional traders. <a href="Barron's_Magazine" class="mw-redirect" title="Barron's Magazine">Barrons</a> shows a detailed breakdown of the NYSE-published program trading figures each week, giving the figures for the largest program trading firms (such as <a href="Investment_banks" class="mw-redirect" title="Investment banks">investment banks</a>).<sup id="cite_ref-online.barrons_5-1" class="reference"><a href="#cite_note-online.barrons-5"><span class="cite-bracket">[</span>5<span class="cite-bracket">]</span></a></sup>

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<div class="mw-heading mw-heading2"><h2 id="Index_arbitrage">Index arbitrage</h2></div>

<p><a href="Index_arbitrage" title="Index arbitrage">Index Arbitrage</a> is a particular type of Program Trading which attempts to profit from price discrepancies between the basket of stocks which make up a stock index and its derivatives (such as the <a href="Future_(finance)" class="mw-redirect" title="Future (finance)">future</a> based on that index). As of July 2012, it makes up less than 5% of the active Program Trading volume on the <a href="NYSE" class="mw-redirect" title="NYSE">NYSE</a> daily.<sup id="cite_ref-online.barrons_5-2" class="reference"><a href="#cite_note-online.barrons-5"><span class="cite-bracket">[</span>5<span class="cite-bracket">]</span></a></sup>

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<div class="mw-heading mw-heading3"><h3 id="Premium_buy_and_sell_execution_levels">Premium buy and sell execution levels</h3></div>

<p>The "premium" (PREM) or "spread" is the difference between the <a href="Stock_market_index" title="Stock market index">stock index</a> <a href="Future_(finance)" class="mw-redirect" title="Future (finance)">future</a> fair value and the actual index level. As the derivative is based on the index, the two should normally have a very close relationship. If there is a sufficiently large difference the arbitraging program will attempt to buy the relatively cheap level (whether that is the basket of stocks which make up the index or the index future) and sell the relatively expensive product, making money from the price discrepancy. The fair value calculation takes into account the time to expiration of the future contract, the dividends received from holding all the stocks, and the interest cost of buying the stocks.<sup id="cite_ref-8" class="reference"><a href="#cite_note-8"><span class="cite-bracket">[</span>8<span class="cite-bracket">]</span></a></sup>

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<div class="mw-heading mw-heading2"><h2 id="Regulations">Regulations</h2></div>

<div class="mw-heading mw-heading3"><h3 id="United_States">United States</h3></div>

<p>In the United States, program trading has been subject to regulation and oversight in response to concerns about its impact on market stability and volatility. The New York Stock Exchange (NYSE) introduced rules known as trading curbs or circuit breakers to address extreme volatility caused by program trading during the 1980s and 90s. Depending on the severity of price movements, these rules can lead to the halt of all program trading or restrict the trading of sell portfolios to upticks only.<sup id="cite_ref-9" class="reference"><a href="#cite_note-9"><span class="cite-bracket">[</span>9<span class="cite-bracket">]</span></a></sup>

</p><p>In addition to NYSE rules, regulatory bodies like the <a href="U.S._Securities_and_Exchange_Commission" class="mw-redirect" title="U.S. Securities and Exchange Commission">Securities and Exchange Commission (SEC)</a> and the <a href="Financial_Industry_Regulatory_Authority" title="Financial Industry Regulatory Authority">Financial Industry Regulatory Authority (FINRA)</a> have established rules governing algorithmic trading strategies, including <a href="High-frequency_trading" title="High-frequency trading">high-frequency trading (HFT)</a>. FINRA Rule 3110 (Supervision) outlines the regulatory requirements for member firms engaged in algorithmic strategies.<sup id="cite_ref-10" class="reference"><a href="#cite_note-10"><span class="cite-bracket">[</span>10<span class="cite-bracket">]</span></a></sup>

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<div class="mw-heading mw-heading3"><h3 id="China">China</h3></div>

<p>The <a href="China_Securities_Regulatory_Commission" title="China Securities Regulatory Commission">China Securities Regulatory Commission (CSRC)</a> has introduced a monitoring and reporting mechanism for program trading in Chinese stock markets in 2023. Stock exchanges in Shanghai, Shenzhen, and Beijing will implement rules on program trading and establish reporting systems to monitor unusual activities. These measures are set to take effect on October 9, 2023. The move comes in response to concerns about the role of computer-generated algorithms in stock trading, which have been blamed for exacerbating sell-offs in China's struggling stock markets.<sup id="cite_ref-11" class="reference"><a href="#cite_note-11"><span class="cite-bracket">[</span>11<span class="cite-bracket">]</span></a></sup>

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<ul><li><a href="Automated_trading_system" title="Automated trading system">Automated trading system</a></li>

<li><a href="Algorithmic_trading" title="Algorithmic trading">Algorithmic trading</a></li>

<li><a href="High-frequency_trading" title="High-frequency trading">High-frequency trading</a></li>

<li><a href="Alternative_trading_system" title="Alternative trading system">Alternative trading system</a></li>

<li><a href="Electronic_trading_platform" title="Electronic trading platform">Electronic trading platform</a></li>

<div class="mw-heading mw-heading2"><h2 id="References">References</h2></div>

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</style><cite class="citation web cs1"><a rel="nofollow" class="external text" href="https://web.archive.org/web/20110716001007/http://www.nyse.com/press/1251367637915.html">"NYSE, New York Stock Exchange > About Us > News & Events > News Releases > Press Release 08-27-2009"</a>. <i>www.nyse.com</i>. Archived from <a rel="nofollow" class="external text" href="https://www.nyse.com/press/1251367637915.html">the original</a> on July 16, 2011.</cite> </span>

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<li id="cite_note-2"><span class="mw-cite-backlink"><b><a href="#cite_ref-2">^</a></b></span> <span class="reference-text">Lemke and Lins, <i>Soft Dollars and Other Trading Activities</i>, §2:35 (Thomson West, 2013-2104 ed.).</span>

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<li id="cite_note-3"><span class="mw-cite-backlink"><b><a href="#cite_ref-3">^</a></b></span> <span class="reference-text"><cite id="CITEREFFurbush2002" class="citation encyclopaedia cs1">Furbush, Dean (2002). <a rel="nofollow" class="external text" href="http://www.econlib.org/library/Enc1/ProgramTrading.html">"Program Trading"</a>. In <a href="David_R._Henderson" title="David R. Henderson">David R. Henderson</a> (ed.). <i><a href="Concise_Encyclopedia_of_Economics" class="mw-redirect" title="Concise Encyclopedia of Economics">Concise Encyclopedia of Economics</a></i> (1st ed.). <a href="Library_of_Economics_and_Liberty" class="mw-redirect" title="Library of Economics and Liberty">Library of Economics and Liberty</a>.</cite> <a href="OCLC_(identifier)" class="mw-redirect" title="OCLC (identifier)">OCLC</a> <a rel="nofollow" class="external text" href="https://www.worldcat.org/oclc/317650570">317650570</a>, <a rel="nofollow" class="external text" href="https://www.worldcat.org/oclc/50016270">50016270</a>, <a rel="nofollow" class="external text" href="https://www.worldcat.org/oclc/163149563">163149563</a></span>

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<li id="cite_note-4"><span class="mw-cite-backlink"><b><a href="#cite_ref-4">^</a></b></span> <span class="reference-text"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="https://www.nyse.com/pdfs/Weekly_History_with_New_Method2.pdf">"NYSE Weekly Historic Stats 2004–2006 using new method"</a> <span class="cs1-format">(PDF)</span>. NYSE.</cite></span>

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<li id="cite_note-online.barrons-5"><span class="mw-cite-backlink">^ <a href="#cite_ref-online.barrons_5-0"><sup><i><b>a</b></i></sup></a> <a href="#cite_ref-online.barrons_5-1"><sup><i><b>b</b></i></sup></a> <a href="#cite_ref-online.barrons_5-2"><sup><i><b>c</b></i></sup></a></span> <span class="reference-text"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="http://online.barrons.com/public/page/9_0210-nysepgtd.html">"Market Data Center | Barron's"</a>.</cite></span>

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<li id="cite_note-6"><span class="mw-cite-backlink"><b><a href="#cite_ref-6">^</a></b></span> <span class="reference-text"><cite id="CITEREFOpalesque2005" class="citation web cs1">Opalesque (August 9, 2005). <a rel="nofollow" class="external text" href="http://www.opalesque.com/fullarticle/8567/program%20trading/Background_article_algorithmic_trading942.html">"Background article: Program trading"</a>.</cite></span>

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<li id="cite_note-7"><span class="mw-cite-backlink"><b><a href="#cite_ref-7">^</a></b></span> <span class="reference-text"><cite id="CITEREFNew_York2015" class="citation web cs1">New York, Fed - Algorithmic trading note (2015). <a rel="nofollow" class="external text" href="https://www.newyorkfed.org/medialibrary/media/newsevents/news/banking/2015/SSG-algorithmic-trading-2015.pdf">"Senior Supervisors Group - Algorithmic Trading Note - 2015"</a> <span class="cs1-format">(PDF)</span>. <i>New York Fed</i>.</cite></span>

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<li id="cite_note-8"><span class="mw-cite-backlink"><b><a href="#cite_ref-8">^</a></b></span> <span class="reference-text"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="http://www.investopedia.com/articles/trading/07/program_trading.asp">"How Program Trading Strategies Work"</a>.</cite></span>

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<li id="cite_note-9"><span class="mw-cite-backlink"><b><a href="#cite_ref-9">^</a></b></span> <span class="reference-text"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="https://www.investopedia.com/terms/p/programtrading.asp">"Program Trading: Meaning, Purpose, Example"</a>. <i>Investopedia</i><span class="reference-accessdate">. Retrieved <span class="nowrap">September 2,</span> 2023</span>.</cite></span>

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<li id="cite_note-10"><span class="mw-cite-backlink"><b><a href="#cite_ref-10">^</a></b></span> <span class="reference-text"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="https://www.finra.org/rules-guidance/key-topics/algorithmic-trading">"Algorithmic Trading | FINRA.org"</a>. <i>www.finra.org</i><span class="reference-accessdate">. Retrieved <span class="nowrap">September 2,</span> 2023</span>.</cite></span>

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<li id="cite_note-11"><span class="mw-cite-backlink"><b><a href="#cite_ref-11">^</a></b></span> <span class="reference-text"><cite class="citation web cs1"><a rel="nofollow" class="external text" href="https://www.caixinglobal.com/2023-09-02/china-tightens-oversight-of-program-trading-in-stock-market-102099623.html">"China Tightens Oversight of Program Trading in Stock Market - Caixin Global"</a>. <i>www.caixinglobal.com</i><span class="reference-accessdate">. Retrieved <span class="nowrap">September 2,</span> 2023</span>.</cite></span>

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</style><div id="Hedge_funds642" style="font-size:114%;margin:0 4em"><a href="Hedge_fund" title="Hedge fund">Hedge funds</a></div></th></tr><tr><th scope="row" class="navbox-group" style="width:1%">Investment<br>strategy</th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"></div><table class="nowraplinks navbox-subgroup" style="border-spacing:0"><tbody><tr><th scope="row" class="navbox-group" style="width:7em"><a href="Arbitrage" title="Arbitrage">Arbitrage</a> /<br><a href="Relative_value_(economics)" title="Relative value (economics)">relative value</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="padding:0"><div style="padding:0 0.25em">

<ul><li><a href="Capital_structure#Arbitrage" title="Capital structure">Capital structure arbitrage</a></li>

<li><a href="Convertible_arbitrage" title="Convertible arbitrage">Convertible arbitrage</a></li>

<li><a href="Market_neutral#Equity-market-neutral" title="Market neutral">Equity market neutral</a></li>

<li><a href="Fixed_income_arbitrage" title="Fixed income arbitrage">Fixed income arbitrage</a> / <a href="Fixed-income_relative-value_investing" title="Fixed-income relative-value investing">fixed-income relative-value investing</a></li>

<li><a href="Statistical_arbitrage" title="Statistical arbitrage">Statistical arbitrage</a></li>

<li><a href="Volatility_arbitrage" title="Volatility arbitrage">Volatility arbitrage</a></li></ul>

</div></td></tr><tr><th scope="row" class="navbox-group" style="width:7em"><a href="Event-driven_investing" title="Event-driven investing">Event-driven</a></th><td class="navbox-list-with-group navbox-list navbox-even" style="padding:0"><div style="padding:0 0.25em">

<ul><li><a href="Shareholder_activism" title="Shareholder activism">Shareholder activism</a></li>

<li><a href="Distressed_securities" title="Distressed securities">Distressed securities</a></li>

<li><a href="Risk_arbitrage" title="Risk arbitrage">Risk arbitrage</a></li>

<li><a href="Special_situation" title="Special situation">Special situation</a></li></ul>

</div></td></tr><tr><th scope="row" class="navbox-group" style="width:7em">Directional</th><td class="navbox-list-with-group navbox-list navbox-odd" style="padding:0"><div style="padding:0 0.25em">

<ul><li><a href="Convergence_trade" title="Convergence trade">Convergence trade</a></li>

<li><a href="Commodity_trading_advisor" title="Commodity trading advisor">Commodity trading advisors</a> / <a href="Managed_futures_account" title="Managed futures account">managed futures account</a></li>

<li><a href="Short_(finance)" title="Short (finance)">Dedicated short</a></li>

<li><a href="Global_macro" title="Global macro">Global macro</a></li>

<li><a href="Long/short_equity" title="Long/short equity">Long/short equity</a></li>

<li><a href="Trend_following" title="Trend following">Trend following</a></li></ul>

</div></td></tr><tr><th scope="row" class="navbox-group" style="width:7em">Other</th><td class="navbox-list-with-group navbox-list navbox-even" style="padding:0"><div style="padding:0 0.25em">

<ul><li><a href="Fund_of_funds#Fund_of_hedge_funds" title="Fund of funds">Fund of hedge funds</a> / <a href="Multi-manager_investment" title="Multi-manager investment">Multi-manager</a></li></ul>

</div></td></tr></tbody></table><div></div></td><td class="noviewer navbox-image" rowspan="5" style="width:1px;padding:0 0 0 2px"><div><span typeof="mw:File"></span></div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%">Trading</th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em">

<ul><li><a href="Algorithmic_trading" title="Algorithmic trading">Algorithmic trading</a></li>

<li><a href="Day_trading" title="Day trading">Day trading</a></li>

<li><a href="High-frequency_trading" title="High-frequency trading">High-frequency trading</a></li>

<li><a href="Prime_brokerage" title="Prime brokerage">Prime brokerage</a></li>

<li><a href="Proprietary_trading" title="Proprietary trading">Proprietary trading</a></li></ul>

</div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%">Related<br>terms</th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em"></div><table class="nowraplinks navbox-subgroup" style="border-spacing:0"><tbody><tr><th scope="row" class="navbox-group" style="width:7em">Markets</th><td class="navbox-list-with-group navbox-list navbox-even" style="padding:0"><div style="padding:0 0.25em">

<ul><li><a href="Commodity_market" title="Commodity market">Commodities</a></li>

<li><a href="Derivative_(finance)" title="Derivative (finance)">Derivatives</a></li>

<li><a href="Stock_market" title="Stock market">Equity</a></li>

<li><a href="Bond_market" title="Bond market">Fixed income</a></li>

<li><a href="Foreign_exchange_market" title="Foreign exchange market">Foreign exchange</a></li>

<li><a href="Money_market" title="Money market">Money markets</a></li>

<li><a href="Structured_finance" title="Structured finance">Structured securities</a></li></ul>

</div></td></tr><tr><th scope="row" class="navbox-group" style="width:7em">Misc</th><td class="navbox-list-with-group navbox-list navbox-odd" style="padding:0"><div style="padding:0 0.25em">

<ul><li><a href="Absolute_return" title="Absolute return">Absolute return</a></li>

<li><a href="Arbitrage_pricing_theory" title="Arbitrage pricing theory">Arbitrage pricing theory</a></li>

<li><a href="Assets_under_management" title="Assets under management">Assets under management</a></li>

<li><a href="Black%E2%80%93Scholes_model" title="Black–Scholes model">Black–Scholes model</a> (<a href="Greeks_(finance)" title="Greeks (finance)">Greeks</a>: <a href="Delta_neutral" title="Delta neutral">delta neutral</a>)</li>

<li><a href="Capital_asset_pricing_model" title="Capital asset pricing model">Capital asset pricing model</a> (<a href="Alpha_(finance)" title="Alpha (finance)">alpha</a> / <a href="Beta_(finance)" title="Beta (finance)">beta</a> / <a href="Security_characteristic_line" title="Security characteristic line">security characteristic line</a>)</li>

<li><a href="Fundamental_analysis" title="Fundamental analysis">Fundamental analysis</a></li>

<li><a href="Hedge_(finance)" title="Hedge (finance)">Hedge</a></li>

<li><a href="Securitization" title="Securitization">Securitization</a></li>

<li><a href="Short_(finance)" title="Short (finance)">Short</a></li>

<li><a href="Taxation_of_private_equity_and_hedge_funds" title="Taxation of private equity and hedge funds">Taxation of private equity and hedge funds</a></li>

<li><a href="Technical_analysis" title="Technical analysis">Technical analysis</a></li></ul>

</div></td></tr></tbody></table><div></div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%">Investors</th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em">

<ul><li><a href="Vulture_fund" title="Vulture fund">Vulture funds</a></li>

<li><a href="Family_office" title="Family office">Family offices</a></li>

<li><a href="Financial_endowment" title="Financial endowment">Financial endowments</a></li>

<li><a href="Fund_of_funds#Fund_of_hedge_funds" title="Fund of funds">Fund of hedge funds</a></li>

<li><a href="High-net-worth_individual" title="High-net-worth individual">High-net-worth individual</a></li>

<li><a href="Institutional_investor" title="Institutional investor">Institutional investors</a></li>

<li><a href="Insurance#Insurance_companies" title="Insurance">Insurance companies</a></li>

<li><a href="Investment_banking" title="Investment banking">Investment banks</a></li>

<li><a href="Merchant_bank" title="Merchant bank">Merchant banks</a></li>

<li><a href="Pension_fund" title="Pension fund">Pension funds</a></li>

<li><a href="Sovereign_wealth_fund" title="Sovereign wealth fund">Sovereign wealth funds</a></li></ul>

</div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%">Governance</th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em">

<ul><li><a href="Fund_governance" title="Fund governance">Fund governance</a></li>

<li><a href="Standards_Board_for_Alternative_Investments" title="Standards Board for Alternative Investments">Standards Board for Alternative Investments</a></li>

<li><a href="Managed_Funds_Association" title="Managed Funds Association">Managed Funds Association</a></li></ul>

</div></td></tr><tr><td class="navbox-abovebelow" colspan="3"><div>

<ul><li><span class="noviewer" typeof="mw:File"><span title="Category"></span></span>Alternative investment management companies</li>

<li><span class="noviewer" typeof="mw:File"><span title="Category"></span></span> Hedge funds</li>

<li><span class="noviewer" typeof="mw:File"><span title="Category"></span></span>Hedge fund managers</li>

<li><span class="noviewer" typeof="mw:File"><span title="List-Class article"></span></span> <a href="List_of_hedge_funds" title="List of hedge funds">List of hedge funds</a></li></ul>

</div></td></tr></tbody></table></div></div><div><div class="zim-footer">

This article is issued from <a class="external text" title="Last edited on 2023-09-03" href="https://en.wikipedia.org/wiki/?title=Program_trading&oldid=1173555806">Wikipedia</a>. The text is available under <a class="external text" href="https://creativecommons.org/licenses/by-sa/4.0/deed.en">Creative Commons Attribution-Share Alike 4.0</a> unless otherwise noted. Additional terms may apply for the media files.

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