Program Trading: An economic perspective

Aaron Honig

June 22nd, 2006

Program Trading - Definition

Electronic trading of a portfolio that represents at least 15 different stocks and over one million dollars in value

Inherently minimizes risk Higher efficiency and lower cost, both impact

the growth of the economy favorably

1987 Stock Market Crash – Black Monday Initial blame was placed on Program Trading

as it was the only variable in the equation that was new

Subsequent research suggests that Program Trading was not the culprit, but rather the scapegoat

Federal regulations were levied as a result of Program Trading

Original Research

Part 1 – Determine if Program Trading as a percentage of total NYSE volume was predictable using other market related variables

Part 2 – Compare the Program Trading trend line against the Fed Funds rate and the GDP trend lines

Part 1 – Regression Analysis

Part 2 – Trend Lines

Program Trading vs. Fed Funds vs. GDP

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Time

Perc

en

tag

e

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Do

llar Average % of Program Trades

Fed Funds Rate

Real Gross Domestic Product

Conclusions

A higher volume of Program Trading creates economic growth through efficiencies and cost savings.

Proposed regulation should be avoided. Program trading as a percentage of the total

NYSE increases as Fed Funds rate increases, although total volume decreases.