Program trading activity is the number of shares included in orders identified as program trades. The NYSE defines program trades as orders involving 15 or more stocks having a combined market value in excess of one million dollars.
This stock index is useful in that it is computed from prices for heavily traded stocks which are frequently involved in program trades. Thus, if program trading does lead to price overreaction, this effect should be most pronounced in these stocks.
(2) Most but not all program trades at the NYSE are routed through SuperDOT, a computerized routing system.
A program trade thus offers two main advantages to a fund manager: it transfers the risk--be this market, transaction, settlement, or foreign exchange-related--from the client to the broker, and it provides the client with immediate execution at a guaranteed price and with reduced transaction costs.
A source at the London stockbroking firm of James Capel told us that he believed there was currently about one program trade (i.e., portfolio trade) per week carried out in the U.K.
Slivka of Salomon Brothers has raised another issue, that of using a program trade to control the actual costs of making a transaction involving a portfolio of shares.
Program trades are usually undertaken blind; that is, the broker does not know the exact composition of the portfolio and must use his judgement in deciding whether or not a particular portfolio should be acquired.
This is partly because firms involved in program trading do not readily publicize the fact, and also because such figures as do exist relate not only to true program trades but also to index arbitrage and portfolio insurance.
According to the NYSE, between January and September, 1987, an average of 15,000 program trading orders passed through the Exchange per day, and on October 19, 1987, a total of 61,000 program trades passed through the NYSE on that single day.