Program Trading

Okay, we’ll watch two episodes of Big Bang Theory...if you first watch one episode of Keeping Up with the Kardashians. Deal?

Um, no. Different kind of programs. Program trades in a Wall Street-y sense are run by a computer program. Hence the catchy name.

Like...a program kicks out that:

- if the S&P 500 is down 0.3% in an hour
- and the U.S. dollar has risen relative to the pound
- and GOOG is outperforming the tech index
- and the moon is in the 7th house and Jupiter is aligned with Mars
- then short a million shares of GE

Or, something like that. And there are a ton of weird, mathy things behind the rationale for each of these trades. Some of it makes sense to normal people; some of it takes three PhDs to translate, rationally. The dangerous thing about program trades is that, usually, there is no human involved. That is, it’s computers trading with computers.

So, um, computers never have glitches, right? Yeah. This is a really smart way to manage your retirement money. Up. Down. Up. Down. Then screeeeaaaaming sideways. Then nothing. Then up. Yeah, welcome to the wild and woolly stock market of the late 1980s. And welcome to the advent of stage one in computers taking over our lives. Especially on Wall Street.

The culprit? Program trading. That is, an investor loves a stock at 20 bucks, but if it hits 12, then she admits she clearly missed something and must sell. So a program kicks off and automatically puts in a sell order. In theory, this is fine, except that another seller with stocks in the same industry has a sell trigger in at 10 bucks. And with a sudden deluge of supply of shares at 12, the stock is quickly pushed to 10. So not only is that stock then dumped at 10, but all the other stocks in that industry, like oil or transport or telecom, then get triggered as well, with "Sell, Mortimer, sell at market" signs.

And then still other program traders have programs that, when the market suddenly dips 3%, they sell all they have, because they believe it's a sign from the Beast that the market is going down 30%, and they want to be long gone before the big crash.

So yeah, this is the world of program trading. Computers talking to computers and then, without really thinking, just executing. Sort of like the Inquisition. Only less garrot-y.