What Is a Basket?
A basket is a collection of multiple securities (e.g., stocks, currencies, etc.) which have a similar theme or share certain criteria. For instance, a sector exchange traded fund (ETF) may contain a basket of stocks that are all in the same industry.
Basket orders execute multiple trades in these securities simultaneously, often requiring a program that executes all the trades at once. Because of the program element, baskets are commonly a part of program trading strategies.
They are used by institutional traders, hedge funds, mutual funds, and exchange-traded funds (ETFs) to quickly and effectively alter their portfolio allocations. Most retail brokers also allow an individual to create baskets and basket orders.
In economics, a basket of goods refers to a fixed set of consumer products and services whose price is evaluated on a regular basis, often monthly or annually, for the purpose of tracking inflation.
- A basket of securities is multiple positions related to a central theme, such as meeting certain criteria, adhering to a certain strategy, or being part of a sector or industry group.
- A basket order simultaneously buys or sells multiple securities in such a basket.
- Most brokers provide basket orders to retail traders, and anyone can hold a basket of securities.
Anyone can create a basket of securities. Basket orders—orders that execute multiple trades at the same time—are also available through most online brokers.
Traders will sometimes refer to collections of stocks as baskets. For example, an index fund is a basket of stocks that all meet certain criteria. A currency basket holds multiple currencies. There are other baskets that may hold only certain types of assets, such as stocks from a certain sector, or futures contracts that align with a certain strategy.
A retail trader may wish to use a basket order if they need to do multiple trades, and they don't want to execute them one by one. They also may want to use a basket order if they need to buy/sell two different securities at exactly the same time, such as with a pairs trade or with a covered call.
A retail trader may also want to use a basket strategy, such as buying or selling all the stocks that gap up or down by a certain amount. Then, they could use a basket order to close all those trades as well.
Once a trader has executed a basket trade, each position is shown individually in the account. The positions can be closed one by one—or any number of them, or all, could be closed with a basket order.
Program Trading of Baskets
In institutional or program trading, the term basket has a more specific meaning. According to the New York Stock Exchange (NYSE), program trading is 15 or more stocks traded as a basket that total more than $1 million.
In this case, a basket refers to an order that includes at least a certain amount of securities in it—and also has a minimum dollar amount—all executed at the same time.
Institutional and program traders use baskets, in large share quantities, because they often need to. When managing large amounts of money, or trading a portfolio that needs to match certain criteria, it is difficult to execute all the trades manually. A program can make all the trades instantly and simultaneously.
In addition, institutional traders may also use baskets for the reasons a retail trader would: executing multiple trades to save time, executing simultaneous trades, or using baskets as part of a trading strategy.
An index fund is a basket of stocks that all meet certain criteria. Indexes, and index funds, need to constantly adjust their portfolio so it holds only stocks that meet their criteria (and also to ensure that stocks are held in the proper weight). As stocks rise and fall, their weight within the portfolio changes daily. Basket trading allows the fund managers to efficiently buy and sell the number of securities needed to rebalance the portfolio.
Basket orders also allow retail or institutional traders to create their own index. Using a basket, a trader can simultaneously buy or sell multiple positions—creating essentially one trade from multiple positions.
For example, assume an investor wanted to buy a car manufacturer but wasn't sure which one. Instead of choosing just one, they could put out a basket order to buy a small amount of every car manufacturer. They now have a position that is based on car manufacturer performance, but it includes multiple stocks instead of just one.
A currency basket consists of a number of individual currencies. The weights of currencies are either determined by the trader or according to a strategy or program. For example, if a trader wants to accumulate a U.S. dollar position, they may sell the EUR/USD, GBP/USD, and AUD/USD, as well as buy the USD/JPY, USD/CAD, and USD/CHF. Then, they put 20% of the funds into both the EUR/USD and GBP/USD. The other 60% of the funds are split between the other four currency pairs—15% in each.
Just like with stocks, institutional traders may need to execute large volumes in multiple currency pairs quickly. A basket order helps them to accomplish this.
Traders could compile baskets of assets for various reasons. They may want a basket of stocks that are part of a certain sector or industry group. A sector ETF is an example of this.
A basket order could be used to simultaneously buy contracts of all the various metals listed on the futures exchange. A trader could also compile a basket that only holds securities that meet a certain strategy. This could entail algorithmic trading, where baskets of securities are bought and sold based on the strategy the algorithm is programmed to trade.
The strategy described above is an example for informational purposes only and is not a recommended strategy without extensive testing and additional parameters in place.
Example of a Stock Market Basket Trade
Assume a trader devises a strategy to buy all the Dow Jones Industrial Average (DJIA) stocks at the end of the day and sell them on the following open. They will do this all long as the DJIA is in an uptrend, as defined by various technical analysis metrics.
The trader sets up a basket order to buy all the DJIA stocks with market-buy-on-close order. This order type, and the basket, allows all the trades to execute simultaneously at the closing bell.
The following morning a basket order is used to simultaneously sell all the securities, using a market-sell-on-open order. The process repeats at each close and each open, assuming the DJIA remains in an uptrend.