Program trade is a type of institutional trading or, in other terms, a trading arrangement used by institutional investors. Program trade refers to the transaction of a large number of stocks simultaneously. In the definition given by the NYSE, program trade is any operation that involves the purchase or sale of a basket of at least 15 stocks with a total value of $1 million or more. Program trades are also called basket trades because they involve a basket of securities. Institutional investors can use program trades for different purposes. Program trades can be used to rebalance the composition of a stock portfolio, to transfer funds from the bond market to the stock market, and all activities commonly referred to as asset allocation. Another typical use of program trade is index arbitrage, which allows to profit from temporary discrepancies between the prices of the stocks comprising an index and the price of stock index futures. Many traders use computer programs, but in the definition of program trades this is not a decisive feature. Instead, program trade includes the purchases or sales of stocks that are part of a "coordinated" trading strategy, even if the purchases or sales are neither entered nor executed contemporaneously, nor part of a trading strategy involving options or futures contracts on an index stock group, or options on any such futures contracts, or otherwise relating to a stock market index. It must be noted that the key component in determining whether the purchase/sale of a large amount of stocks may be classified or reported as "Program Trading" is whether the trading strategy is "coordinated", and not the condition of being a computer-driven ("CD") trading strategy (strategy executed through a computer model or "black box").

FABOZZI F., MODIGLIANI F. and JONES F. (2010), Foundation of Financial Markets and Institutions, Pearson International Edition.


Editor: Bianca GIANNINI

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