Corporate Advisory Insight: Program Trading

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Hallie Elsner from Thomson Reuters’ Corporate Advisory Services group discusses Program Trading.

Transcript:
As computers continue to become more and more integrated into our daily lives, many decisions that would have been made by us are now left up to technology. Take the example of online retailers, many of which suggest products to users based on the user’s previous purchases. In this case, computers are using algorithms developed through back testing to make an educated guess as to what the customer may be interested in. This trend has been growing consistently, as innovations and improvements in technology appear at an astounding rate. The same principle has been extended to the financial world as well.

Hi, I’m Hallie Elsner, and today we will be discussing program trading.

Every day on Wall Street computers trade large blocks of stock triggered only by an algorithm, or an advanced mathematical equation, developed to provide guidance and make trading decisions in the markets. These trades are called “program trades”, and they occur in significant volume and with great frequency, accounting for nearly 30% of the volume of the NYSE. Additionally, the use of algorithms in trading allows investors to obtain the best possible prices without significantly affecting the stock price or increasing purchasing costs.

The human element is not completely ignored in program trading. While computers are relied upon to initiate trades when market conditions meet a certain level, the underlying strategy behind a program buy or sell is often not computer — generated. The algorithms themselves vary dramatically for different portfolios in order to accommodate the goals and targets set by et managers and brokers. Because each algorithm is unique to each player, it is considered a trade secret to the firm and therefore is closely guarded.

Algorithmic trading is a close relative to program trading and has been more prevalent recently. This type of trade occurs when a computer program takes a large order, breaks it up into small blocks of typically 100-300 shares, and gradually submits these pieces to the market. The goal is to complete the order without other market participants realizing that a large trade is in progress. Despite such efforts, program trading can cause prices to fluctuate wildly. Deep sell-offs and rallies in the major indices can be attributed to program trading, which tends to focus primarily on companies within the three broader indices. However, program trading also provides a tremendous amount of liquidity to the market and therefore contributes to an efficient marketplace.

Program trades account for a large amount of market activity and therefore should be regarded accordingly. Savvy investors should be aware of the ability of program trades to move markets when making investment decisions.

I’m Hallie Elsner and this is Corporate Advisory Insight.

Duration : 0:2:39

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