Program Trading

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Program Trading?

Program trading, also known as system trading, is done by machines using the programs or algorithms by the set strategies to effectively and efficiently trade in the market without human intervention. Large investors, fund houses, and generally used by large investors, fund houses, and hedge funds large volumes.

Key Takeaways

  • Program trading, or system trading, involves using computer programs or algorithms to execute trades in the market without human intervention. It enables efficient and effective trading based on predetermined strategies. 
  • Examples of program trading include principle trades, basis trades, and contra trades, where the execution is driven by automated systems rather than manual decision-making. 
  • Program trading typically requires a high volume of trades to be executed according to the predefined strategy. 
  • It is designed to exploit market inefficiencies and multiple securities opportunities. 

How Does it Work?

A few algorithms are set for executing a program trading, such as selling stocks in a portfolio if the stock valuation crosses 10% of the overall portfolio value. Once the algorithms are set, the software contracting securities in the market places orders as mentioned in the program if the required conditions meet. This way, the applications keep running and executing orders independently without external support.

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Types of Program Trading

Some prominent and popular types are mentioned below: –

#1 – Principle Trades

A trader generally buys a group of stocks, mainly replicating popular stock indexes Stock IndexesThe stock index, which is also known as the stock market index, is a tool used to determine the performance of shares/securities in the market and to calculate the return on the stock of their investment investors use it to have knowledge about the performance of investments and access the total value they possess.read more such as the S&P 500. Then, as the retail customers purchase it, the principal traders release the trades in the market and fulfill the customers’ orders. In this way, apart from earning a commission, a brokerage is also made.

#2 – Basis Trades

Another type of trading is known as basis tradesBasis TradesBasis trading is a monetary trading strategy that involves purchasing a specific financial instrument, such as a stock or a commodity, and then selling its related derivative.read more. In this case, a prominent investor generally takes a position in similar securities to milk the price inefficiencies. This strategy is also used in contra trades where one security is bought, and a similar one is sold to reduce the exposure in the market.

#3 – Contra Trades

The contra trades are used in different markets too. Such as, to cover the position of one security in the physical market, one could sell an option or futures if the required security is not available at the estimated price. Then, later on, using the leverage of futures and options, the original position is squared off with less turbulence due to the back of derivatives.

Examples of Program Trading

Program Trading Strategy

Such trading happens in a large volume and requires a strategy to perform. First, a strategy or a pattern is observed or devised, and then programs are coded. Once the entire setup is ready, these programs wait for the required trigger point, and as soon as the market meets the coded criteria, trade happens. Humans do monitor the process of the programming and processing of businesses.

Advantages

Disadvantages

Conclusion

It is widely used across markets and countries and provides an altogether different paradigm for trading. Though expensive, competitive, and heavily monitored, it grows as the days pass. Also, due to technological advancements and active participation in the securities markets, the days are not far when it will become a norm in the trading fraternity.

Frequently Asked Questions (FAQs)

1. What is program trading vs. algorithmic trading? 

Program trading and algorithmic trading are closely related but have slight differences. Program trading refers to the execution of a large number of trades simultaneously based on a predefined set of rules or strategies. It typically involves the use of computer programs to execute trades automatically. On the other hand, algorithmic trading focuses on the use of mathematical algorithms to generate trading signals and execute trades. 

2. What is program trading vs. electronic trading? 

Program trading and electronic trading are related concepts but have different scopes. Program trading refers to the execution of a set of trades based on predetermined rules or strategies. It can involve electronic trading systems to automate the execution process. On the other hand, electronic trading refers to the overall process of conducting financial transactions electronically, including order placement, matching, and execution. 

3. Is program trading the same as portfolio trading?

Program trading involves the execution of a set of trades based on predetermined rules, which can involve the simultaneous buying or selling of multiple securities. On the other hand, portfolio trading refers to the execution of trades for an entire portfolio of securities in a single transaction. 

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