What is the plan of the program?
Software trading refers to the use of computer-generated algorithms to trade a wholesale, sometimes high-frequency stock basket. The algorithms are programmed to run, controlled by people, although once run, the programs create crafts, not humans. However, people can activate or deactivate the program if necessary.
- Software trading refers to the use of computer-generated algorithms to trade a wholesale, sometimes high-frequency stock basket.
- The NYSE defines software trading as the buying or selling of a group of 15 or more stocks with a total market value of $ 1 million or more as part of a systematic trading strategy.
- 2021 Software trading accounts for 70-80% of all US stock exchange trading during the normal trading day, up from 90% in times of extreme volatility.
Understanding the trade-off of the program!
The New York Mercantile Exchange (NYSE) defines software trading as the buying or selling of a group of 15 or more stocks with a total market value of $ 1 million or more as part of a coordinated trading strategy. This type of trading can be called portfolio trading or basket trading.
Orders are placed directly on the market և are executed according to pre-determined instructions. The trading algorithm can buy, for example, a portfolio of 50 shares in the first hour of the day. Institutional investors, such as hedge fund managers or mutual fund traders, use software trading to conduct large-scale transactions. Execution of orders in this way helps to reduce the risk by placing orders at the same time և can maximize revenue by taking advantage of market inefficiencies. It would not be very efficient to place such a large number of orders manually.
Program software trading accounted for 50% to 60% of all trading sessions that took place during the normal 2018 trading day. As of 2021, software trading accounts for 70% to 80% of US stock exchange trading during a typical trade. days when that number reaches 90% in times of extreme instability.
The marketing of the program has greatly contributed to certain investments in the field of investment, including:
- The idea that trading a diversified securities portfolio reduces inherent investment risks.
- The fact that institutions own and sell more equity than ever before և software trading allows them to implement their diversified strategies more effectively.
- Technological advances have reduced the cost of trading, making trading more efficient and valuable.
Firms can have software trading strategies that run thousands of trades a day or only trade every few months. Indeed, the trading volume and frequency of programs vary greatly from firm to firm, from strategy to program. A one-day trading program will be much more active than an investment program designed to balance the portfolio only on a regular basis.
Many market participants blamed the program trading for the extreme instability that contributed to the significant market crashes in the 1980s and 1990s. As a result, the NYSE introduced rules that prevent software trades from occurring at certain times to minimize volatility. Program Restrictions are known as trade curbs or switches.
Under NYSE rules, depending on the severity of the price action, all program trades may be stopped or portfolio sales may be restricted to trading only.
The commercial purpose of the Trad program
There are several reasons for trading a program. These include the main, agent և main trade.
- Main business!. The brokerage firm can use the software trade to buy a portfolio of shares under its own account, which, in their opinion, will increase in value. They can “sell” these shares to their clients for a commission to generate additional revenue. The success of this strategy depends largely on how well the brokerage firm chooses the winning stock.
- Agency Trading!Investment management companies that trade exclusively for clients can use software trading to acquire shares that are in the company’s model portfolio. Shares are credited to customer accounts after purchase. Fund managers can also use the program trade for balancing purposes. The fund can use software trading, for example, to buy or sell shares, to balance the portfolio with its target allocations.
- Main business!. Program software trading can be used to exploit the wrong price for such securities. Investment managers use software trading to buy stocks that they think are undervalued; և short stocks that are overvalued. The manager can cut the group of semiconductor stocks that are supposedly overvalued, և buy stocks of basket equipment that are likely to be undervalued. Profit is made when the prices of the two groups of securities coincide.
Business example of a Trad program
Assume that the hedge fund holds 20 shares in the portfolio, allocating 5% of the portfolio to each share. At the end of each month, they rebalance their portfolio so that each share represents 5% at a time. They do this by selling shares with more than 5% holdings or by buying shares with less than 5% holdings. Some shares may be removed from the portfolio and others may be added. New shares that are added will be allocated to 5% of the portfolio.
Over time, some stocks will rise and some will fall, leading to a change in the total value of the portfolio, as well as a change in the percentage distribution of each of these stocks.
If the portfolio is $ 10 million, for example, the 5% stake is $ 500,000. Let’s say the hedge fund was bought by Apple Inc. (AAPL) when it was selling for $ 100 and now it is selling for $ 200. Assuming all the other stocks are not moving (unlikely to actually happen, but for demonstration purposes), the position is now worth $ 1 million, the rest of the portfolio is $ 9.5 million, so the total portfolio is $ 10.5 million. APPL represents 9.5% of the portfolio ($ 1 million divided by $ 10.5 million). The 9.5% stake is much higher than the 5%, so the shares would be sold to return the allotment to 5%, which is $ 525,000 (from $ 5.5 to $ 10.5 million).
Now imagine that all 20 stocks move every day, վերջ at the end of each month some will be worth 5.5% or 6% and others 4% of the portfolio. The trading software trading algorithm can look at the portfolio equity և quickly execute all transactions at once by buying redistributed shares և selling those that are redistributed within seconds of balancing the portfolio. Doing this by hand will be much more difficult and time consuming.