program trading

program trading a form of securities trading, also known as index arbitrage. Program traders exploit the price discrepancies between indexes of stocks and futures contracts by using sophisticated computer models to hedge positions. Program trading (also called computer-assisted trading) arose with the advent of computer and telecommunication technologies, whereby trade in different markets could be monitored simultaneously and manipulated accordingly. Because the size of the transactions often caused massive jolts in the stock market, many concluded that program trading was largely responsible for the 500-point drop in the Dow Jones Industrial Average on Oct. 19, 1987. During the economic recession that followed, the New York Stock Exchange put new restrictions on computerized trading, and many companies refused to do business with any brokerage house that engaged in program trading. With the unprececented growth of the stock market in the later 1990s, program trading saw a resurgence in some trading houses.

program trading Trading on financial markets using computer programs. The programs used trigger trading automatically once certain limits are reached. It was said to account for some 10% of the daily turnover on the New York Stock Exchange in the late 1980s and has been partly blamed for the market crash in October 1987. Subsequently the New York Stock Exchange imposed limits on program trading.