Program Trading - as a noun, refers to proposed market orders to buy or sell stocks being generated by programs on a trader’s computer and being sent directly to a market’s computer for execution.
The NYSE defines a Program Trade as:
For a comprehensive discussion on Program Trading,
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From the above definition, it is easy to see that this process, Program Trading, is not something that the small investor does from him or herself. It is something done by the large speculators.
The programs used in this process, as I understand them, do not consider the actual worth (book value) of the stock, the dividends paid to stockholders or even the earnings of the companies whose stocks are being traded. These programs only watch the market changes and react to them. Hence, left unchecked, they, the programs and the speculators, buy and sell stocks among themselves in large volumes causing rapid movements in the price of many stocks.
Limiting the hours of operation of the stock markets as suggested elsewhere on this web site and, therefore, the reporting of stock prices to once each day, would eliminate most, if not all, of the variations in stock prices that are caused solely by Program Trading.
Finally, note that the definition of a Program Trade appears to involve only stocks from the Standard & Poor’s 500 Index. I do not know but I suspect that the software programs used in Program Trading involve many other highly traded stocks as well.
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Original: 08/01/02
Revised: 07/28/03