Program trading is a specific method of investing. It is not uncommon and it is one of the most widely used methods of investing in some instances. In short, this particular type of trading method occurs using computerized methods. This type of trading is often high end, meaning institutional investors are the ones using it. These institutional investors perform very large amounts of trades at one time. With this volume, there is often the need to use a program rather than allowing the trade to be recorded using traditional methods. It is important for consumers and investors to understand what this trading method is and what it means to the investment world.
How Does Program Trading Work?
A more detailed explanation of program trading focuses on how many stocks are traded. This type of trading method focuses on security investments. In this method, baskets or bundles (you may see these reported as either of these notations) are traded in groups, usually of at least 15 stocks at a time. A computer program does the trading process.
What makes program trading so important is because it can happen very quickly. It can be programmed to make the trade when a specific condition is met within the market. As a fast method of trading, it is often ideal for users in a variety of circumstances.
2 Common Reasons for Program Trades to Take Place
#1 – There is a need to trade a large amount of stocks quickly or at the same time. If an individual cannot handle the actual trade by hand, so to speak, the use of computer technology to do so can work well. A good example of when this may work properly is when a mutual fund receives funds that will increase its holdings in multiple stocks. When there is a need to move large amounts of stocks at once, this trading method works ideally.
#2 – There is a desire to react to very small or very precise conditions within the marketplace. Some investors want to take advantage of temporary price changes or discrepancies between one or more financial instrument. In this instance, the speed of these trading methods works in the favor of the individual. One example is when an investor wants to take advantage of discrepancies between an index and any of its parts.
There is no doubt that trades using this type of method are common. According to the NYSE, in 2006, about 30 percent of all transactions on average, and 46.4 percent at the highest point, were from program trading. In 2012, this figure remained the same at about 30 percent.
Why Is It Important?
Program trading is a popular method of investing for many reasons. The biggest factor that has led to widespread use of this investing method is the readily accessible Internet and communications systems. In short, there are numerous exchanges and access points to investing now that were not present at a prior time. Technology now allows for users to pick specific points at which they wish to buy or sell. Then to simply let it happen without any human intervention in the process. Additionally, many people who invest in hedge funds and other strategies that are very complex benefit from these types of software programs. More complex trading algorithms and higher frequency trading are all possible with this method that simply were not possible previously. There is little doubt that these types of investment tools will remain present and in everyday use for a very long time.