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Programmed Trade
Understanding Programmed Trade
A programmed trade refers to the use of computer algorithms to execute large orders automatically based on pre-set rules. These trades are typically used by institutional investors, hedge funds, and proprietary trading firms to reduce market impact, improve efficiency, and take advantage of market opportunities.
How Programmed Trading Works
Programmed trades are executed using algorithmic trading software, which automates the buying and selling process based on predefined conditions such as:
- Price Levels – Orders execute when a stock reaches a target price.
- Volume Targets – Trades are split into smaller orders to prevent price disruption.
- Time Intervals – Orders are placed at specific times to maintain market stability.
Types of Programmed Trading
- Index Arbitrage – Simultaneous buying and selling of index futures and underlying stocks to profit from price differences.
- VWAP (Volume-Weighted Average Price) Trading – Trades execute to match the average price over a set time.
- TWAP (Time-Weighted Average Price) Trading – Orders are evenly spread throughout a trading session.
- Statistical Arbitrage – Uses mathematical models to identify and exploit market inefficiencies.
- Market-Making Strategies – Provides liquidity by continuously placing buy and sell orders.
Common Challenges Related to Programmed Trading
Despite its advantages, programmed trading comes with challenges:
- Flash Crashes – Rapid sell-offs caused by algorithmic reactions to market conditions.
- Execution Risks – Poorly designed algorithms can cause unintended losses.
- Regulatory Scrutiny – Authorities monitor high-frequency trading for market manipulation.
- Latency Issues – Slower execution times can impact profitability in fast-moving markets.
Step-by-Step Guide to Implementing Programmed Trading
1. Choose the Right Trading Algorithm
- Determine whether you need arbitrage, market-making, or trend-following strategies.
- Backtest the algorithm using historical data before deploying it live.
2. Set Trade Execution Rules
- Define entry and exit conditions, volume limits, and stop-loss parameters.
- Use VWAP or TWAP execution to avoid excessive market impact.
3. Monitor Market Conditions
- Adjust algorithms based on volatility, liquidity, and price trends.
- Implement risk controls to prevent runaway trading losses.
4. Use Reliable Technology and Infrastructure
- Ensure low-latency connections for high-speed order execution.
- Secure robust server hosting to avoid system failures.
5. Stay Compliant with Market Regulations
- Monitor SEC, FCA, and exchange-specific rules on high-frequency and algorithmic trading.
- Avoid quote stuffing and spoofing, which are illegal market manipulation tactics.
Practical and Actionable Advice
To optimise programmed trading:
- Test Algorithms Regularly – Market conditions change, requiring adjustments to trading models.
- Use Risk Management Controls – Implement automatic circuit breakers to prevent extreme losses.
- Monitor Execution Quality – Ensure trades fill at optimal prices to maintain profitability.
- Diversify Trading Strategies – Combine multiple algorithms to reduce dependency on a single method.
FAQs
What is programmed trading?
It is the use of automated trading systems to execute large stock or derivatives orders based on predefined rules.
Who uses programmed trading?
Institutional investors, hedge funds, proprietary trading firms, and market makers.
How does programmed trading differ from algorithmic trading?
Programmed trading refers to large order execution, while algorithmic trading includes a wider range of automated trading strategies.
What risks are associated with programmed trading?
Flash crashes, execution errors, regulatory scrutiny, and market impact risks.
Can retail traders use programmed trading?
Yes, but retail traders typically use simpler algorithmic trading tools rather than large-scale institutional strategies.
What is index arbitrage in programmed trading?
It involves simultaneous buying and selling of index futures and their underlying stocks to exploit price discrepancies.
Do programmed trades affect market volatility?
Yes, especially during high-speed algorithmic trading, which can cause rapid price swings.
How do regulators monitor programmed trading?
Authorities track order patterns, trade execution speeds, and suspicious activities like spoofing and front-running.
What is a flash crash in programmed trading?
A sudden market drop caused by automated trades triggering a chain reaction of sell orders.
How can traders protect against programmed trading failures?
By using stop-loss orders, circuit breakers, and continuous monitoring of algorithm performance.
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Trading Glossary
- 10-K Filing
- 10-Q Filing
- 401(k) Plan
- 8-K Filing
- Abandonment Option
- Absolute Return
- Acceleration Clause
- Accrued Interest
- Accumulation Distribution Line
- Acid-Test Ratio
- Acquisition
- Active Return
- Active Return
- Active Trading
- Adjusted Basis
- Advance/Decline Line (A/D Line)
- Advanced Decline Ratio
- After-Hours Trading
- Algorithmic Trader
- Algorithmic Trading
- All or None (AON)
- Alligator Indicator
- Alpha Capture
- Alpha Generator
- Alternative Investment
- Alternative Investment Market
- American Depositary Receipt (ADR)
- Amortizing Swap
- Analytical Profile
- Anchored VWAP
- Annual Percentage Rate (APR)
- Annualized Return
- Anti-Dilution Provision
- Arbitrage
- Arbitrage Pricing
- Arbitrage Pricing Theory
- Arbitrage Pricing Theory (APT)
- Ascending Triangle
- Ask Price
- Ask Size
- Asset Allocation
- Asset Allocation Model
- Asset Coverage Ratio
- At the Money (ATM)
- Auction Market
- Auction Market Preferred Stock (AMPS)
- Auction Market Theory
- Authorized Participant (AP)
- Average Cost Basis
- Average Directional Index (ADX)
- Average Directional Movement Index (ADX)
- Backtesting
- Backward Integration
- Backwardation
- Balance of Trade
- Balance Sheet
- Bank Guarantee
- Banker’s Acceptance
- Bar Chart Analysis
- Bar Magnitude
- Barrier Option
- Base Currency
- Base Currency
- Basket of Goods
- Basket Trading
- Bear Market
- Bear Spread
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- Behavioural Finance
- Best Efforts Underwriting
- Beta Adjusted
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- Bid Price
- Bid-Ask Spread
- Black-Scholes Model
- Block Order
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- Blue Chip Stocks
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- Bond
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- Broker
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- Bull Market
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- Buy and Hold Strategy
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- Buy the Dip
- Buy-Side Analyst
- Calendar Spread
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- Call Option
- Candlestick Charting
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- Capital Appreciation
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- Capital Gain Distribution
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- Capital Markets
- Carry Trade Strategy
- Cash Commodity
- Cash Flow Statement
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- Central Bank Intervention
- Central Counterparty Clearing House (CCP)
- Channel Trading
- Chart Overlay
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- Charting Software
- Chinese Wall (Information Barrier)
- Circuit Breaker Mechanism
- Clearing
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- Coefficient of Variation
- Collateralized Debt Obligation (CDO)
- Commodity Channel Index (CCI)
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- Competitive Advantage
- Compound Annual Growth Rate (CAGR)
- Compound Option
- Confirming Indicators
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- Consumer Price Index (CPI)
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- Corporate Bond
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- Custodian
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- Day Order
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- Dealer
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- Debt-to-Equity Ratio Analysis
- Defensive Investment
- Delivery
- Delta Hedging Strategy
- Derivative
- Derivative Market
- Descending Triangle Pattern
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- Discount Broker
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- Discretionary Trading
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- Dividend Yield
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- Double Bottom Reversal
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- Efficient Frontier Concept
- Electronic Trading
- Elliott Wave Theory Application
- Emerging Markets
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- Equity
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- Equity Linked Note (ELN)
- Equity Risk Premium Calculation
- ETF (Exchange-Traded Fund)
- Exchange Rate
- Exchange Rate Mechanism (ERM)
- Exchange-Traded Note (ETN)
- Execution Risk
- Expiry Date
- Exponential Moving Average (EMA)
- Exposure Netting
- Fair Value
- Fair Value Gap (FVG)
- Fast Market
- Fibonacci Retracement Levels
- Fill or Kill (FOK)
- Fill or Kill Order (FOK)
- Financial Engineering Techniques
- Financial Future
- Firm Order
- Fixed Income Securities Analysis
- Flash Crash
- Floating Exchange Rate System
- Floating Rate Note (FRN)
- Floor Broker
- Forex
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- Forex Swap Agreement
- Forward Contract
- Forward Contract
- Forward Contract Pricing
- Free Riding
- Front Running
- Front Running Practice
- Front-End Load
- Fundamental Analysis Methods
- Fundamental Trading
- Futures Contract
- Futures Contract
- Futures Contract Specifications
- Futures Exchange
- Futures Market
- Gamma Scalping
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- Gap Analysis
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- Gearing
- Gearing Ratio
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- General Obligation Bond
- Global Depositary Receipt (GDR)
- Good Faith Deposit
- Good Till Cancelled (GTC)
- Good-Till-Cancelled Order (GTC)
- Good-Till-Cancelled Order (GTC)
- Green Bond
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- Green Shoe Option
- Gross Domestic Product (GDP)
- Gross Domestic Product (GDP) Impact
- Gross Margin
- Growth Investing
- Growth Investing Strategy
- Guaranteed Investment Contract (GIC)
- Haircut (Margin)
- Hammer Candlestick
- Hammer Candlestick Signal
- Hanging Man Pattern
- Hanging Man Pattern Recognition
- Hard Currency
- Hard Currency Definition
- Harmonic Patterns
- Harmonic Price Patterns
- Head and Shoulders Pattern
- Head and Shoulders Top
- Hedged Position
- Hedging Strategies in Financial Trading
- High Water Mark
- High-Frequency Trading (HFT)
- High-Frequency Trading (HFT)
- High-Frequency Trading (HFT) Systems
- High-Yield Investment Program (HYIP)
- Hot Money
- Hypothecation
- Ichimoku Cloud
- Ichimoku Kinko Hyo Indicator
- Illiquid Asset
- Illiquid Asset Management
- Immediate or Cancel (IOC)
- Immediate or Cancel Order (IOC)
- Implied Volatility (IV)
- Implied Volatility Surface
- In the Money (ITM)
- Index
- Index Arbitrage
- Index Arbitrage Opportunities
- Index Option
- Indicative Quote
- Inflation
- Initial Margin
- Insider Ownership
- Insider Trading
- Insider Trading Regulations
- Institutional Investor
- Institutional Investor Role
- Interbank Rate
- Interest Rate
- Interest Rate Parity (IRP)
- Interest Rate Parity Theory
- Intermarket Analysis
- Internal Rate of Return (IRR)
- International Monetary Fund (IMF)
- Intraday Trading
- Intraday Trading Strategies
- Introducing Broker
- Inverted Yield Curve
- Inverted Yield Curve Implications
- Investment Club
- Investment Horizon
- IPO (Initial Public Offering)
- IPO Lock-Up
- Jump Trading
- Junk Bond
- Kagi Chart
- Key Performance Indicator (KPI)
- Kill Switch
- Knight Trading
- Ladder Options
- Lagging Span
- Layering (Spoofing)
- Leverage
- Leverage ETF
- Limit Move
- Limit Order
- Liquidity
- Liquidity Provider
- Liquidity Trap
- Listed Security
- Live Order
- Loan-to-Value Ratio (LTV)
- London Fix
- Long Position
- Lot Size
- Lot Size
- Macro Risk
- Maintenance Call
- Maintenance Call
- Maintenance Margin
- Managed Account
- Margin
- Margin Call
- Margin Debt
- Market Breadth
- Market Capitalization Rate
- Market Depth Chart
- Market Dislocation
- Market Exposure
- Market Failure
- Market If Touched Order (MIT)
- Market Index
- Market Maker
- Market Microstructure
- Market Order
- Market Sentiment
- Marking the Close
- Mean Reversion Strategy
- Mezzanine Financing
- Mid-Price Order
- Minimum Tick
- Momentum Investing
- Monetary Policy
- Money Market Fund
- Morning Star Pattern
- Moving Average Convergence Divergence (MACD)
- Moving Average Ribbon
- Multi-Leg Option Strategy
- Multilateral Trading Facility (MTF)
- Municipal Bond
- Mutual Fund
- Naked Short Selling
- NAV (Net Asset Value)
- Negative Carry
- Negative Equity
- Negotiable Instrument
- Net Asset Value (NAV)
- Net Exposure
- Net Long
- Net Present Value (NPiV)
- Net Short
- Noise Trader
- Nominal Interest Rate
- Nominee Account
- Non-Callable Bond
- Non-Deliverable Forward (NDF)
- Non-Directional Trading
- Odd Lot
- Odd Lot Theory
- Odd Lot Trade
- Offer Size
- On Balance Volume (OBV)
- On-Balance Volume (OBV)
- One Cancels Other Order (OCO)
- Open Interest
- Open Interest
- Open Outcry System
- Opening Price
- Option Adjusted Spread (OAS)
- Option Greeks
- Option Series
- Options Contract
- Order Book
- Order Flow
- Order Flow Analysis
- Order Imbalance
- Order Routing
- Out of the Money (OTM)
- Over-the-Counter (OTC)
- Over-The-Counter (OTC) Market
- Overlapping Fibonacci
- Oversubscription
- P&L (Profit and Loss)
- Pac-Man Defence
- Paid-In Capital
- Paper Loss
- Parabolic SAR
- Parity Price
- Participation Rate
- Passive Investing
- Pegged Exchange Rate
- Pegged Order
- Penny Stock Rule
- Penny Stocks
- Performance Bond
- Pink Sheets
- Pip
- Pips in Forex Trading
- Point and Figure Chart
- Portfolio Insurance
- Position Limit
- Position Limit
- Position Sizing
- Post-Market Trading
- Pre-Market Trading
- Preferred Stock
- Premium
- Price Action
- Price Discovery
- Price Earnings Ratio (P/E)
- Price Limit
- Price Limit Orders
- Price-to-Book Ratio (P/B Ratio)
- Price-To-Earnings Growth (PEG) Ratio
- Primary Dealer
- Prime Brokerage
- Programmed Trade
- Proprietary Trading
- Proprietary Trading
- Proprietary Trading System (PTS)
- Protective Call
- Public Offering Price (POP)
- Pump and Dump
- Put Bond
- Put-Call Parity
- Quantitative Easing
- Quantitative Easing (QE)
- Quantitative Trading Models
- Quote Currency
- Quote Driven Market
- Rally
- Random Walk
- Random Walk Theory
- Rate of Change (ROC) Indicator
- Real Interest Rate
- Real-Time Data
- Rebalancing
- Redemption Fee
- Regression Analysis
- Regulatory Arbitrage
- Rehypothecation
- Relative Strength
- Relative Strength Index (RSI)
- Repo Rate
- Repossession
- Resistance Level
- Resistance Zone
- Retail Investor
- Retracement
- Return on Assets (ROA)
- Reversal Pattern
- Reverse Auction
- Reverse Stock Split
- Risk Arbitrage
- Risk Management
- Risk-Adjusted Return
- Risk-Free Rate
- Roadshow
- Roll Over
- Roll Yield
- Round Lot
- Round Lot
- Round Turn
- Runaway Gap
- Scalper
- Scalping Strategy
- Secondary Market
- Secondary Offering
- Sector Fund
- Sector Rotation
- Security Market Line (SML)
- Sell Limit Order
- Sell Short
- Selling Climax
- Settlement
- Settlement Date
- Settlement Date
- Sharpe Ratio
- Short Covering Rally
- Short Interest
- Short Put
- Short Selling
- Short Selling
- Sideways Market
- Simple Interest
- Small Order Execution System (SOES)
- Soft Commodity
- Specialist
- Speculation
- Speculative Grade Bond
- Spin-Off
- Split Adjusted
- Spot Price
- Spread
- Spread Betting
- Spread Option
- Square Position
- Standard & Poor's 500 Index (S&P 500)
- Standard Deviation
- Statutory Voting
- Stock Index Future
- Stock Market Crash
- Stock Split
- Stop Order
- Stop Price
- Stop-Limit Order
- Stop-Loss Order
- Stop-Loss Order
- Straddle Strategy
- Straight Bond
- Strangle Strategy
- Strike Price
- Strip Bond
- Structured Note
- Subordinated Debt
- Subscription Agreement
- Support Level
- Swap
- Swap Rate
- Swaption
- Swing Chart
- Swing Trading
- Synthetic ETF
- Synthetic Position
- Synthetic Position
- Synthetic Position
- Synthetic Position
- Systemic Risk
- Take-Profit Order
- Take-Profit Order
- Takeover
- Tape (Consolidated Tape)
- Technical Indicator
- Theta (in Options)
- Tick Chart
- Tick Size
- Ticker Symbol
- Time Decay (Theta) in Options Trading
- Time Value of Money (TVM)
- Time-Weighted Return (TWR)
- Total Expense Ratio (TER)
- Trade Confirmation
- Trading Curb
- Trading Halt
- Trading Session
- Trading Volume
- Trailing Stop Order
- Treasury
- Treasury Stock
- Trend Analysis
- Trend Line
- Triple Bottom Pattern
- Triple Top Pattern
- Turnkey Trading System
- Turtle Trading
- Two-Way Quote
- Unbundling
- Uncovered Option
- Underlying Asset
- Underwriter
- Unemployment Rate
- Unlevered Beta
- Unsystematic Risk
- Uptick Rule
- Uptick Volume
- Value at Risk (VaR)
- Value Date
- Vanna (in Options)
- Variable Cost
- Vega (in Options)
- Vega Neutral
- Venture Capital
- Vertical Spread
- VIX Option
- Volatility
- Volume
- Volume Profile
- Wash Trading
- Washout Pattern
- Wedge Pattern
- Weighted Average Price
- Weighted Moving Average (WMA)
- Whipsaw
- White Knight Strategy
- White Label Platform
- Williams %R Indicator
- Williams Alligator Indicator
- Window Dressing
- Working Capital
- World Trade Organization (WTO)
- Wrap Account
- Write-Off
- Yield
- Yield Curve
- Yield Curve
- Yield Maintenance
- Zero-Beta Portfolio
- Zero-Bound Interest Rate
- Zero-Cost Collar
- Zero-Delta Strategy
- Zero-Interest-Rate Policy (ZIRP)
- Zero-Sum Game
- Zero-Volatility Spread (Z-Spread)
- Zeta Model
- Zombie Company
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