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How Program Trading Strategies Work

Program trading strategies happen behind the scenes, trading up to 30% of the daily volume at the NYSE. They trade without emotion and can be highly profitable. These trades, called program trades, take place quietly, oblivious to the chaos of the trading floor. However, savvy investors would be foolish to ignore how and why a system that produces an average of more than half of the daily trading volume on the New York Stock Exchange (NYSE) does so well.

Key Takeaways

  • Program trading refers to the use of computer-generated algorithms to trade a basket of stocks in large volumes and sometimes with great frequency.
  • The algorithms are programmed to run and are monitored by humans, although once running the programs generate the trades, not humans.
  • Program trading strategies may execute thousands of trades a day (e.g. high-frequency trading, or HFT), while other strategies only execute trades every few months to rebalance long-term portfolios.
  • While increasingly popular, program trading has also been blamed for market failures such as flash crashes.

Defining a Program Trading Strategy

People Plan the Strategy…

Contrary to popular belief, the underlying portfolio strategy behind a program buy or sell is often not computer-generated. The goals may be as disparate as portfolio balancing to broad asset allocations to sector allocations. They may be intraday strategies, short-term, or long-term strategies. The actual strategies, and the algorithms that generate program buys and sells are proprietary to each player and are among the most closely guarded secrets on Wall Street.

…But Computers Do the Work

Program trades are almost always executed by computers, although there are instances when this isn’t the case. For example, if institution XYZ wants to sell a basket of 15 stocks totaling $2 million, it could simply split up the sale among several different brokers. Conversely, a big buy program on a single stock may go directly to a market maker or to a single broker who then splits it up into smaller units. As a practical matter, the NYSE is only interested in regulating the computer-generated program trades, and in particular, those generated by large movements in the futures premium.

Program Trading Is Everywhere

Importantly, much of program trading involves the futures markets as well as the cash market. The most simplistic and widely known of these strategies is index arbitrage. Index arbitrage is frequently used by institutions with very large and diverse stock portfolios under management.

For example, an institution buys futures when the premium is low, while it simultaneously sells a basket of stocks in a hedged trade to garner a few points of return over what a portfolio of S&P stocks would produce on its own.

The important point for the individual investor is that the futures market and the cash market are intimately intertwined. Moves in one market can trigger moves in the other. Every day, the S&P futures have a fair value based on a formula that includes, for example, days to expiration and the cost of carry for a commensurate basket of stocks.


As of 2018, it was reported that program trading accounted for 50% to 60% of all market trades placed during a typical trading day, with that number rising to above 90% during periods of ext

There are certain levels of premium that will generate program trades, although it varies slightly among firms due to different costs of carry. Every day there are “buy execution levels” and “sell execution levels.” The best (and only public) source of information for daily fair value and premium execution levels can be found at HL Camp & Co.’s Program Trading Research site. Additionally, the NYSE publishes program trading activity by member firms every week for the previous week at its website. This is interesting reading, but not particularly useful for real-time decisions.

Rules Rules Rules

Timing Is Key

The Bottom Line

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About Amy Harvey

Amy R. Harvey writes forStartUps Sections In AmericaRichest.

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