Terminology, Trading

Buy Programs and Sell Programs (Program Trading) in the Markets

If you’ve been trading in the stock market for some time, you might have had some questions of this nature:

  • Most stocks have very similar intraday price action patterns as the index (unless there are stock-specific news or events). Why is that? Can the scale really be due to “manual trading”?
  • If the big boys want to drive down the market, and they short a ton of index futures causing the index futures market to drop quickly, how do they ensure that the stock market (i.e. the actual cash index) follows suit?
  • What keeps the cash index and the index futures markets in sync?
  • How are key levels defended to ensure that they are not breached (for fear of bringing an ‘unwanted’ set of market participants into play)?
  • How are key levels attacked to ensure that the market moves in the intended direction after the big boys have finished accumulating / distributing?

As the title of this post suggests, the ‘culprit’ are the buy and sell programs run by the big boys. These buy and sell programs work to move the stock market and the futures market in an intended direction by simultaneously buying or selling a whole basket of securities. This is also known as Program Trading, defined by the NYSE as the simultaneous purchase or sale of at least 15 different securities worth at least $1 million.

Some quick points

  • VolumeNYSE reports that program trading amounts to 31.2% of total volume for the last week of May 2013.
    • This FAQ from HL Camp & Co. says that you should multiply that by 2.
  • Index Arbitrage: Out of that 31.2%, Barrons show that only 0.5% of that is due to Index Arbitrage trading (i.e. buying the futures and shorting the index stocks, or vice versa when premiums over fair value go too far out of sync).
    • Some index arb threshold levels here.
  • Smart Buying / Selling: Most buy and sell programs weight the stocks based on their firm research rather than do equal dollar purchases.
    • Sampling of stocks being bought and sold. This can offer a clue as to which stocks to avoid or go for.
  • Terminology: PREM = premium = Current futures price – underlying cash index.
    • Index Arb programs kick in once the PREM reaches certain threshold levels.
    • DTN, eSignal, and Comstock offer real-time PREM figures for both the SPX (spoos) and the E-mini.
  • BMT has an old article about how program trading is used to make money the Thursday before Friday options expiration
    • Thurs 2.10pm CST: Buy in-the-money puts on OEX (S&P 100) on CBOE.
    • Thurs 2.20pm CST: Start shorting in big blocks the OEX stocks on NYSE. Everyone will panic and sell because the market near the close.
    • Thurs 3.09pm CST: Buy in-the-money OEX calls.
    • Thurs 3.16pm CST: Send notice to immediately exercise all the puts.
    • Fri 8.31am CST: Buy up all the shorts to push up the OEX, then sell all the calls.




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