Find the whole interview here, but adding to my provious post about what algorithmic trading is, this is a useful post.
See the whole interview here
Dave: First, can you please tell us exactly what program trading is and how it moves the markets?
Hank: That's a good question and there are really different answers and definitions depending on who you ask. Probably the best known definition is from the New York Stock Exchange. The NYSE says that any time a member firm executes a trade in 15 or more stocks simultaneously that are worth more than a million dollars, this "simultaneous trade" is to be defined as a program trade. Also that NYSE member firm that did that simultaneous trade must report that trade to the exchange. That is how the NYSE knows that program trading is now over half of the volume.
For us, however, a program trade is one that encompasses the PREM with a predetermined execution level either as a buy trigger or a sell trigger. Whether we trade only one stock, or 15 or more stocks, during the time that PREM execution level is hit, is not as important to us as the actual PREM execution level being hit in the first place. That pattern of PREM execution levels hitting on certain days and at certain times is the key to program trading for us and our clients. And it is not just for plain vanilla index arbitrage, either. The PREM is the key for almost all program trading.
Others define program trading as the purchase or sale of a large number of stocks contained in or comprising a portfolio. Sometimes you will hear clerks on the NYSE say that a sell program or a buy program is being done on the floor. But this type of portfolio change, typically done by mutual funds, is not as important for us or our clients. If the PREM is not moving, then we do not consider it a true program trade.
Dave: How did program trading first come about? What is its origin?
Hank: We knew that index arbitrage, a type of program trading, would occur even before the S&P Futures contract ever started trading in 1982. The concept of a futures contract trading above or at a premium to the actual price of the underlying cash commodity was well known at that time. We knew that the S&P futures would trade at a premium to the underlying stocks in the S&P cash index, and that sometimes that premium or PREM could get way out of line...so much so that we could sell the futures contract and buy the stocks in that index as the same time and make a profit on the difference in prices. Once the S&P Futures contract began trading, we began plotting the PREM in real time and could instantly see whenever that PREM did move a lot and got way out of line. When it did, we could instantly see the results of that buy or sell program as the Dow Jones moved quite a few points in only 5 or 6 minutes. We have continued to track the PREM tick by tick since 1982.