Program Trading Heavier Than Ever

Computerized program stock trading, blamed by some for stoking current market volatility, has been at its heaviest ever this month as the trading tool is used by more big investors, experts say.

Birinyi Associates, a market-tracking firm, said in a new study of program trading that since January 1995, both “buy” and “sell” orders directed by the computerized trading strategies are getting longer in minutes, more numerous each day, and are moving the major blue-chip stock indexes--such as the Dow Jones industrial average--to a greater extent.

The New York Stock Exchange said the percentage of daily NYSE volume attributed to programs hit 19.1% in the week ended Aug. 15, versus an average share of about 14% previously.

Ralph Bloch, technical analyst at brokerage Raymond James & Associates, said anecdotal evidence pointed to program trading accounting for as much as 30% of daily volume in recent sessions.

Program trading, a catch-all term for a number of computer-driven trading techniques, enables mutual funds and other big institutions to quickly get into and out of large “baskets” of individual stocks, as opposed to trading them piecemeal throughout the day.

But in the process, the trading strategies can roil the markets--especially late in the day, which is when many such programs are executed in order to buy or sell stocks near the close of trading.

Indeed, the Dow index has swung widely most days for the last several weeks. Since Aug. 8, the Dow has closed up, or down, more than 100 points in seven of the 14 sessions.

In fact, Birinyi Associates’ study found that the effect of the programs on the market on a day-to-day basis has grown tenfold since January 1995, while the market itself has only doubled.

“We just track the programs, and we don’t speculate on what’s happening,” said Greg Schoenleber at Birinyi in Greenwich, Conn. But the obvious reason for the rise of program trading is that “people are using [them] to gain advantage” in moving large blocks of shares.

The surge in program activity has occurred even though the NYSE restricts certain types of programs whenever the Dow moves more than 50 points.

Programs offer “a great opportunity for customers to get large transactions done quickly, efficiently and cheaply,” said David Baker, head of program trading at NatWest Securities.

Still, analysts say there are other reasons why programs have appeared to have more effect on the market this month than before. For one, many investors are on vacation, so trading volume overall has slowed, which means program activity can have more influence.

Also, the NYSE’s shift in June to trading stocks in increments of sixteenths instead of eighths has added to volatility by encouraging traders to take advantage of more minute price moves.

Bloch and others note that despite the volatility program trading may add, such trading doesn’t change the fundamental direction of the market. Rather, programs just exacerbate whatever the market trend may be, up or down.