Sophisticated equity traders have been watching program trading activity for years. Keeping an eye on the premium (PREM) or spread between the most active S&P 500 future’s contract fair value minus the cash value is a time honored tradition to determine when stock buy or sell programs should kick into gear. While this tactic has proven itself as a smart way to get an edge in the market, just what is program trading and how is it changing within the trading landscape?
Program trading is generally defined as trading a basket/portfolio of 15 or more different stocks with a combined value of at least $1 million. This form of trading is primarily used by institutions and was spawned by the rapid growth in Electronic Communication Networks or ECN’s. A recent survey has revealed that program trading volumes have increased more than 50% over the last year.
Interestingly, despite the volume increase, program trading has taken a back seat to more sexy strategies such as HFT and dark pools in the financial press. This can be a good thing for the program trading firms as their bread and butter operations are under the radar of media scrutiny unlike their brethren. What is causing this increase in program trading volume? The cause is three fold, technological improvements, the market itself, and strategic changes. Let’s take a closer look at each of these program trading volume drivers.
Over the next year and further, program trading is very likely going to continue to grow in popularity and volume. Long term trend changes in the marketplace make this practically a given.
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