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Program trading is a type of trading in securities , usually consisting of baskets of fifteen stocks or more that are executed by a computer program simultaneously based on predetermined conditions. Several factors help to explain the explosion in program trading. Technological advances spawned the growth of electronic communication networks. These electronic exchanges, like Instinet and Archipelago Exchange , allow thousands of buy and sell orders to be matched very rapidly, without human intervention.
In addition, the proliferation of hedge funds with all their sophisticated trading strategies have helped drive program-trading volume. As technology advanced and access to electronic exchanges became easier and faster, program trading developed into the much broader algorithmic trading and high-frequency trading strategies employed by the investment banks and hedge funds. Program Trading is a strategy normally used by large institutional traders.
Barrons shows a detailed breakdown of the NYSE-published program trading figures each week, giving the figures for the largest program trading firms such as investment banks.
Index Arbitrage 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 future based on that index.
The "premium" PREM or "spread" is the difference between the stock index future 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. From Wikipedia, the free encyclopedia. Concise Encyclopedia of Economics 1st ed. Library of Economics and Liberty. Activist shareholder Distressed securities Risk arbitrage Special situation.
Algorithmic trading Day trading High-frequency trading Prime brokerage Program trading Proprietary trading. Arbitrage pricing theory Assets under management Black—Scholes model Greeks finance: Vulture funds Family offices Financial endowments Fund of hedge funds High-net-worth individual Institutional investors Insurance companies Investment banks Merchant banks Pension funds Sovereign wealth funds.