Talk:Program trading
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[edit] Problems with this article
This description of program trading in this article is entirely inaccurate. Program trading is the execution of large baskets of (typically) equities, with the aim of minimising "market impact", which is the propensity for a large trade to adversely move the price against itself before execution is complete. Program trading is a service offered by investment banks, usually to large investment funds such as pensions, index trackers and the like.
The trade can be executed by the investment bank in an "agency" fashion, or "as principal". As agency, the client bears the price risk of execution (if they are filled at 39.5, they will receive 39.5). When trading agency, the bank will often/usually attempt to achieve the VWAP (volume weighted average price) daily benchmark for each stock. Typically such execution will be done by "slicing" the order into smaller orders, in an attempt to reduce the market impact of the trade. This slicing can be done linearly - 10,000 shares gets split into 10 slices of 1000 - or may follow the volume curve, where trading is heavier at the start and end of the day and the slices are weighted accordingly. When buying, a price above VWAP means they have over-performed, whereas a price below indicates under-performance. The opposite naturally applies when selling.
As principal, the investment bank will "purchase" the program from the client without knowing its contents, and will then aim to execute it at a better price than they paid the client for it. The latter approach obviously involves larger risk for the investment bank.
Algorithmic trading *may* be considered a subset of program trading, but only in the sense of algorithms that attempt to achieve a benchmark price.
Program trading typically caters to customers who "must" trade - they cannot elect to keep an order out of the market, even if it will adversely affect their price, because they are bound by some condition such as always holding a certain percentage of US equities, etc., etc.
I am happy to dig out some references and things for what I've written above (I've been working in PT for nearly ten years), and turn it into a proper article.
Program trades need to be specifically marked as such when submitted to the exchanges, and there are certain restrictions placed on programs that do not apply to non-program trades (NYSE rule 80-A, for example).
what rule?
... and at the same time to trade slowly enough so that you do not impact the stock by "walking the book".
walking the book?
S Sepp 12:30, 13 June 2006 (UTC)
[edit] walking the book
Rudimentary program trading began in the seventies, with the trades in the program being walked around to the market maker's (specialist's) posts at the New York Stock Exchange.[1]
"Program trading is extremely popular in hedge funds" isn't entirely true. I think "Program Trading" is most popular with institutional investors who manage large funds. Hedge funds often try to profit off from program trades.
The last line "Computers also allow traders to test their strategies against historical data in an attempt to predict and optimize them for future conditions." has nothing to due with the article.
[edit] testing strategies
Give the last line its due. Maybe it means "The program trading technique also allows traders to test their program trading algorithms against historical data in an attempt to predict and optimize their program trading algorithms for future conditions." —Preceding unsigned comment added by 218.132.197.145 (talk) 03:14, 24 May 2008 (UTC)
