Program Trading

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What Is Program Trading?

Program trading refers to computer-driven strategies that automatically buy or sell large baskets of many stocks at once, often in response to preset conditions or price relationships between markets. One common form, index arbitrage, exploits gaps between stock index futures and the underlying shares. Because these systems can generate large volumes of orders very quickly, they can move markets faster than human traders alone. Program trading is frequently cited as having exacerbated the 1987 Black Monday crash, when the New York Stock Exchange's order systems were overwhelmed by a record volume of about 604 million shares.

Why It Matters

Program trading matters because it highlighted how automation can strain market infrastructure and accelerate declines. On Black Monday, the interaction of program trading with portfolio insurance produced waves of selling that swamped the NYSE's Designated Order Turnaround (DOT) electronic routing system. In response, exchanges adopted trading collars and rules such as the NYSE's Rule 80A restricting index arbitrage program trading once the market moved a set number of points, alongside circuit breakers halting trading after steep declines. The episode began a decades-long effort to manage the risks of increasingly fast, automated markets, a concern that has only grown in the era of high-speed electronic trading.

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