DEFINITION of 'Program Trading'

Program trading uses computer algorithms to buy and/or sell a basket of securities. Orders are placed directly into the market and executed according to predetermined instructions. For example, a trading algorithm might buy a portfolio of 50 stocks over the first hour of the day. Institutional investors, such as hedge fund managers or mutual fund traders, use program trading to execute large-volume trades. Executing orders in this way helps reduce risk by placing orders simultaneously and can take advantage of market inefficiencies.

BREAKING DOWN 'Program Trading'

Program trading is defined by the New York Stock Exchange (NYSE) as the purchase or sale of a group of 15 or more stocks that have a total market value of $1 million or more and are part of a coordinated trading strategy. This type of trading may also be referred to as portfolio trading or basket trading. (For further reading, see: The Power of Program Trades.)

Purpose of Program Trading

Principal Trading: A brokerage firm may use program trading to buy a portfolio of stocks under their own account that they believe will increase in value. To generate additional revenue, they might then onsell these stocks to their customers to receive a commission. The success of this strategy largely depends on how successful the brokerage firm’s analysts are at selecting winning stocks.

Agency Trading: Investment management firms that trade exclusively for clients may use program trading to buy stocks that are in the firm’s model portfolio. Shares then get allocated to customer accounts after being purchased. Fund managers may also use program trading for rebalancing purposes. For instance, a fund might use program trading to buy and sell stocks to rebalance a portfolio back to its target allocations.

Basis Trading: Program trading can be used to exploit the mispricing of similar securities. Investment managers use program trading to buy stocks they believe are undervalued and short stocks that are overpriced. For example, a manager could short a group of semiconductor stocks that he or she thinks are overvalued and purchase a basket of hardware stocks that appear undervalued.  Profits result when the prices of the two groups of securities converge.

Regulation of Program Trading

Many market participants blamed program trading for causing extreme volatility that contributed to significant market crashes in the 1980s and 90s. This resulted in the NYSE introducing rules that prevent program trades executing during certain times to minimize volatility. Depending on the severity of the price action, all program trading may be halted, or sell portfolios may be restricted to only trading on upticks. Program trading restrictions are known as “trading curbs” or “circuit breakers.” (To learn more, see: The Perils of Program Trading.)

RELATED TERMS
  1. Program Manager

    A program manager oversees the management of a specific program, ...
  2. Basket

    A basket is a unit of at least 15 stocks that are used in program ...
  3. Cash for Clunkers

    Cash for Clunkers was a former federal program that gave owners ...
  4. Arbitrage Trading Program (ATP)

    An arbitrage trading program (ATP) is a computer program that ...
  5. Algorithmic Trading

    A trading system that utilizes very advanced mathematical models ...
  6. Public-Private Investment Program ...

    The Public-Private Investment Program (PPIP) was created during ...
Related Articles
  1. Trading

    The Power of Program Trades

    Learn how programs make up a significant portion of the volume traded each day.
  2. Trading

    The Perils Of Program Trading

    The increasing use of program trading makes market glitches inevitable - and sometimes disastrous.
  3. Trading

    Basics Of Algorithmic Trading

    Algorithmic trading is the process of using computers for placing trades in order to generate profits at a speed and frequency that are beyond a person’s capability.
  4. Trading

    How trading algorithms are created

    Here, we'll outline the steps quantitative traders and traders using algorithms follow in order to create their algorithms.
  5. Retirement

    Retirement Programs That Help Low Income Seniors

    Plans and strategies for building a healthy and satisfying life, even if your retirement income isn't as high as you wish it could be.
  6. Small Business

    4 Government Grants for Small Business Owners

    Discover common resources available to and used by small business owners and entrepreneurs in funding initiatives through government grants.
  7. Managing Wealth

    Employee Wellness Perk: For Your Financial Health

    A growing number of employers offer free financial wellness programs that supply tools to help employees handle money issues and build a strong future.
  8. Managing Wealth

    5 Best Fortune 500 Mentorship Programs

    These top Fortune 500 companies offer mentorship programs to recent graduates.
  9. Financial Advisor

    Asset Manager Ethics: Placing and Managing Trades

    Five guidelines have been created to assist asset managers on the best practices for placing and managing trades in client accounts.
RELATED FAQS
  1. How do I use software to make arbitrage trades?

    Understand the meaning of arbitrage trading, and learn how traders employ software programs to detect arbitrage trade opportunities. Read Answer >>
  2. What caused Black Monday: The stock market crash of 1987?

    Find out about the factors behind the stock market crash of 1987, also known as Black Monday, when the Dow Jones Industrial ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center