Definition of Program Trading

The New York Stock Exchange (NYSE) defines program trading as the purchase or sale of a basket of 15 or more stocks having a market value of $1 million or higher. Today, a program trade is typically carried out by a computer system linked directly to a market's computer system. The trade occurs automatically when the basket of stocks hits a given price. This approach is most commonly used by hedge funds or private equity groups with access to highly sophisticated computers. Because of the speed of these computers and the impact of such a large trade, program trading is regulated by each market. 

Oversight of Program Trading

Program trading can skew a market, causing problems for the day-to-day investor. In order to oversee this issue and protect the investor, the NYSE and other markets require a Daily Program Trading Report (DPTR). This report discloses all program trades made by a specific organization on a daily basis. All told, program trading can account for one-third to one-half of all trades on a given exchange on a daily basis. The Securities and Exchange Commission (SEC) and NYSE have a vested interest in ensuring these trades are carried out in an ethical and responsible manner.

Market Manipulation

Prior to the introduction of hedge funds and sophisticated computerized trading, program trading was not as prevalent on the market. However, with these changes to the landscape of investing, more and more investment groups were aiming not to profit from the market but to manipulate it for their profit. Instead of selecting quality companies and investing in their future, many hedge funds attempt to predict company failures and market bubbles. They do so with mathematical formulae, and these formulae are not designed to actually add capital to the market as a whole. Instead, they are designed simply to predict changes, make a profit and get out before the profit can be lost. 

Criticisms of Market Manipulation

Many economists strongly critique the process of program trading and market manipulation. They point out that the buying power of relatively few investment groups can create bubbles and manipulate statistics that actually end up harming the majority of the investors in a market who are less sophisticated. As a result of these critiques, each market restricts the time and place when program trades can occur.

Trading Curbs

Limitations on the use of program trading are called "trading curbs." If the Dow Jones Industrial Average drops 10 percent, program trading on the NYSE is stopped for one full hour. If the drop is 20 percent, program trading is stopped for 2 full hours. Finally, with a 30 percent drop or more, program trading is stopped for the entire day. Curbs according to point drops may also occur based on the time of day when the drop happens. If an investment firm initiates a program trade during these "black out" periods, it will likely be discovered. Otherwise, it would have to include the trade on a DPTR and be discovered later and sanctioned by the exchange. Failure to disclose a trade on the DPTR would also result in sanctions. 

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