PROGRAM TRADING

noun Also written programme trading (Business World) In financial jargon, trading in a basket of securities rather than single issues; more specifically, a type of arbitrage (see arb) in which traders take advantage of a difference in market values between a portfolio of securities and stock-index futures on essentially the same stocks, by taking a long or short position in the stocks at the same time as an offsetting position in a futures contract. Etymology: Formed by compounding: this form of trading is complex and sophisticated, and can only be carried out with the aid of high-powered computer programs which show when there is a suitable discrepancy in values for the trader to exploit. History and Usage: Program trading is a phenomenon of the computerized financial markets of the eighties and arose in the US in the early years of the decade. It is a low-risk form of arbitrage, but one which normally involves very large portfolios of securities and considerable sums of money, and so it is only practised by those with substantial capital behind them. It has been criticized for creating great volatility in the markets, particularly at the times when options are about to expire (see triple witching hour), since a great deal of buying and selling can be sparked off at these times by program trading and the computer-driven nature of these deals means that they are regarded as less controllable than deals decided upon by human agents. The collapse of Wall Street's biggest sustained rally last week sparked new controversy over the use of computers by big investors for so-called program trading. Courier-Mail (Brisbane) 27 Jan. 1987, p. 21 Wall Street is gradually returning to some semblance of stability. This process will greatly be helped by the curbs on computerised programme trading announced on Thursday by the New York Stock Exchange. Financial Times 4 Nov. 1989, Weekend FT, p. II If small investors want to end the stock market volatility that is being caused by program trading, they may have to stop complaining to their congressional representatives and stockbrokers and, instead, send off an angry letter to the guy who watches over their own pension money. Washington Post 5 Nov. 1989, section H, p. 15