shutterstock_124476025Trading nowadays have largely benefited from technology. It has provided a higher level of convenience among traders that were once not available in the past. But the same convenience and benefits that technology may offer shows a downside. Take for example the current use of what many traders call as program trading.

What Is It?

Program trading is a method of trading that uses a computer program to execute certain movements based on predetermined conditions. This type of trading usually involves using baskets of fifteen stocks or more as basis for what the program will act upon. The trading actions are executed automatically, usually with minimal human intervention.

Program trading is also defined as index arbitrage, which is a type of early program trading that tries to profit from the price differences between different collections of stocks making up a stock index as well as its derivatives.

Possible Risks

As the progress in computing technology moves in leaps and bounds, traders have become more interested in program trading to squeeze out the most possible profit from a tough market. Although it provides the convenience among traders for making quick actions and movements, there is a certain risk that it brings along with it. Program trading can sometimes inject some volatility in the market. A wrong algorithm in the system can also result in erroneous trading movements that can be quite damaging financially.

The automated executions of program trading can make it difficult for traders to halt until it has done some effect on the market or for the trader using it. Once a certain position is affected by a wrong program trading move at a considerable volume, the effect may be swift. It can even affect the trading among those who do not use such a system but take a close look at market movements. In a way, faulty program trading can cause a domino effect in the market that can cause substantial changes, even though it may just be artificial. But the effect can have costly consequences for most traders.