What is program trading? There are many forms of program trading. The New York Stock Exchange (NYSE) defines program trading as a portfolio transaction containing 15 or more index constituent stocks with a value of more than 1 million. These portfolio transactions are conducted simultaneously. Simply put, Program trading is to buy or sell a basket of stocks at the same time. There are also a few program transactions that are hybrid program trading that both buy and sell stocks. Buying a basket of stocks at the same time is called program buying, and selling a basket of stocks at the same time is called program selling. Program trading is primarily a tool of large institutions that buy or sell entire portfolios of stocks simultaneously or nearly simultaneously, and buying and selling programs can be used to achieve a variety of different goals. The program trades stocks traded on the New York Stock Exchange and their corresponding options traded on the Chicago Board Options Exchange and Americas Exchange, as well as S&P 500 futures contracts traded on the Chicago Mercantile Exchange. These financial products are traded based purely on predetermined relationships between their prices, rather than on any fundamental factors such as each company's earnings, dividends or growth prospects, interest rate changes, currency fluctuations, policy actions, etc.

Program trading can be divided into two categories: arbitrage and nonarbitrage. Arbitrage program trading is index arbitrage trading, which includes all methods that identify index arbitrage or index substitutes. strategies for trading. The source of index arbitrage profits is the deviation of the actual value relationship between stock index futures and spot goods from the theoretical value relationship. Index arbitrage is a form of program trading. Examples of other forms of program trading include convenient liquidation, EFP (futures for spot) Liquidation and portfolio management of stock positions, and portfolio management includes portfolio alignment and portfolio liquidation. Although program trading accounts for an increasing proportion of total trading volume, the proportion of index arbitrage in program trading continues to decline. It accounted for more than half in 1988, dropped to 1/3 in 1995, and was 17% in the fourth quarter of 1997. Only 3% of the trading volume was. The various components of program trading on October 21, 1997 were as follows: 16% of transactions subject to Rule 80A, mainly index arbitrage, and 84% of program transactions not subject to Rule 80A. Among transactions not subject to rules, portfolio restructuring accounts for 35.02%, risk reduction and hedging accounts for 5%, portfolio liquidation accounts for 2.57%, futures-for-spot transactions account for 2.35%, customer convenience accounts for 0.84%, and convenient liquidation accounts for 0.84%. 0.04%, and 54% for the rest of the trade.

Due to the popularization of information tools, the inefficiency of the market is much smaller, and the profits of index arbitrage are much smaller. To obtain profits, larger trading volumes and more complex models are required. And not only is the model important, but equally important are strong computing power, low transaction fees, and low capital costs. Therefore, the proportion of index arbitrage will inevitably decrease, and the proportion of other strategies will inevitably increase. One of the main program trading methods is called paired trading, which uses econometric models to identify overvalued and undervalued stocks in the market and sell high prices. Undervalued stocks, buy undervalued stocks, and then use futures to hedge the market risk of this program. Although it is called pair trading, in fact, the number of stocks bought and sold is not necessarily balanced. In 1997, pairs traded stocks accounted for 30% of all program trading.

Looking at the program trading system from the perspective of technical structure, it uses computer hardware and software to design, implement and manage investment positions in the financial market, including using network equipment to provide real-time price data in the financial market. These prices and The transaction cost data are input into the computer together and processed by professional software to see if there are trading opportunities. Automatic trading based on signals from a computer program, usually a computer system that feeds the market directly from the trader's computer and executes it automatically. Program trading companies use a large number of computer models to design different stock portfolios corresponding to futures. For example, a company could run a program to identify a portfolio of stocks that are most closely related to futures, thus maximizing potential profits and minimizing the risk of program trading. In other words, the trade occurs when two markets meet certain conditions, namely that the stocks in the portfolio are overvalued or undervalued relative to futures. However, pure index arbitrage accounts for only a small proportion of program trading. Firms may also trade stocks that meet certain volatility and liquidity characteristics. The biggest difference between arbitrage and non-arbitrage trading is that there is an equilibrium in the market, and the high-speed computing power of computers can discover disequilibrium in the market, thereby profiting from the process of disequilibrium to equilibrium. In fact, program buying and selling have nothing to do with computer intelligence. All programmed transactions can be completed manually, but they are very complicated and require a computer.

Program trading began in the early 1980s, when large institutions began to adopt index arbitrage strategies, which were to profit from the price differences of stocks and their derivative securities. Portfolio insurance also became popular in the early 1980s. Portfolio insurance refers to the use of stock index futures and options to protect a portfolio of stocks against market declines.

Portfolio insurance programs allow large institutions to sell large amounts of shares when certain parameters of an insurance model reach a predetermined value. It is estimated that in the mid-1980s there were approximately $90 billion worth of stock portfolios protected by portfolio insurance. Some people believe that the important underlying reasons for the sharp market fluctuations in 1987 were portfolio insurance and index arbitrage. However, portfolio insurance trading ceased after 1987, and in 1988 the exchange issued Rule 80A restricting program trading.

There are many forms of program trading, and some programs are still index arbitrage. In addition, some hedge funds (hedgefunds) use program trading. So-called "market neutral" hedge funds often construct long/short portfolios, which include buying a basket of stocks and selling another group based on a specific variable, such as the price-to-earnings ratio (P/E). stock. They often hold these portfolios for a month or a quarter. Market-neutral investing refers to an investment strategy that neutralizes specific market risks. It holds offsetting long and short positions based on actual or theoretical relationships between financial instruments, with the purpose of limiting the risk of changes due to macroeconomic variables or market conditions. The risk of systemic price fluctuations caused by changes in sentiment. Unlike traditional investments, where profits come from the movement of securities, the source of profits is the relationship between securities. For traders who adopt a market-neutral strategy, they sell securities short, while mutual funds generally only go long. The market neutralization strategy is to take advantage of the ineffective pricing of Present and Future. The source of inefficiencies in pricing between related securities is the structural characteristics of financial markets. Investment performance obtained by taking advantage of market inefficiencies can be better than the market average return-risk relationship.