Program Trading

Updated on May 28, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
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 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 trades. 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

  • In 2018, it stated that approximately 55% of all the trading on a typical day was done with the help of an algorithm, and on some days, it went up to 90%. For instance, let us assume that a Hedge Fund wants to purchase a basket of securities at a predetermined price. In one go, it programs via algorithms. As the stated criteria meet, the securities are obtained; similarly, these could be sold. Umpteen strategies are plying the market in today’s world that the program trading could execute.
  • Another example could be the automatic buying or selling of securities to maintain the portfolio balance. The program could be taught to buy or sell the security once the individual security value goes up or down the 10% mark of the total portfolio.

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.


  • Program trading is unimaginably fast, and various trades can be placed in microseconds. But, on the other hand, in arbitrage, a buy and sell order needs to be put simultaneously. Even the slightest delay could eradicate the profit margin. So, in these situations, algorithm trading is used.
  • Large or institutional investors generally use hedge funds and mostly place orders according to a set strategy. However, sometimes multiple stocks are required to buy in one go. Thus, program trading comes in handy in these circumstances.
  • Because of its fast-paced order placing capabilities coupled with workings on predetermined strategies, the algorithm trading helps the traders or arbitrageurs exploit the opportunity of mispricing in the market.
  • Again, as machines perform the program trading, it lacks human emotions and hurdles. Trading from the automated route does not involve indiscipline, fear, greed, and other emotions posing a barrier to the desired strategy.


  • Many market participants complained about extreme volatility in the decade leading to the 1990s, mostly caused by program trading. In a wake-up call, NYSE has imposed certain restrictions in times of massive volatility. Depending upon the security price, program trading is halted or subsided. It is widely known as circuit breakers. It could restrict the strategies or efficiency of the trading at times.
  • Program trading is quite expensive regarding data feeds and the personnel to run. Therefore, all traders cannot avail themselves of these options as the costs are quite steep.
  • Irrespective of speed, accuracy, and punctuality, it still suffers technical and mechanical failures. The programs are not infallible and can make errors due to technical glitches.


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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