The Power of Program Trading

Program trading is a type of automated stock trading that involves institutional investors making large trades. With this type of trading, an institutional investor will buy at least 15 stocks and at least $1,000,000 will change hands. Program trading is commonly used by many of the bigger mutual funds in the market today. Here are a few things that you should know about program trading.

Program Trading

This type of trading is also sometimes referred to as system trading. With this type of trading strategy, computers do the heavy lifting. Investment managers set the criteria for the trading activities of the trading programs. These criteria are programmed into the trading software and then the computer programs go out and implement the trading strategy.

Trading Strategies

Program trading could entail many different trading strategies and objectives. The managers of these trading programs may have many different things in mind when they place a large order. They may be trying to reach a certain level of asset allocation for a larger portfolio. They might be taking a long-term approach to investing in a particular industry. They may even be making a short-term play on the market sentiment in the industry. These strategies are put into an algorithm and are then programmed by advanced computer programmers.

How it Affects the Market

This type of trading can have a drastic effect on the market. When program traders decide to place trades, they are buying a large amount of shares all at once. This can significantly increase the price of that particular stock in the market. Many times, program traders will all do business at approximately the same times of the day. When this occurs, it can drastically swing the market. Many times, these program traders will invest heavily in a particular financial index. When this happens, other investors should take notice because it will potentially have an effect on their investments.

Impact to Investors

As an individual investor, you may not think that program trading could help you that much. Most people do not have over $1 million that they can randomly invest into the stock market all at once. However, you can pay attention to the moves that are being made by these companies and potentially make some profit.

Many times, if you pay attention to the market analysts, you will hear something about program traders making a move. When this happens, you can keep track of when the move was made and what the results were. After a certain amount of time watching the charts and watching how program traders operate, you will be able to identify a move in the market. Many times, the same program traders will trade at similar times each day or week. If you can keep track of the moves that are being made, it would most likely be to your benefit to go in the same direction as the program traders. This way, you will be on the right side of the trend when the price moves. 

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