Released: September 01, 2006

Could program trading threaten stock market?

Source: By Brooke A. Masters, Washington Post (Free Registration)

In the late 1980s, whiz kids on Wall Street were experimenting with computerized trading programs, using new technology that allowed them to trade millions of shares of stocks and related options simultaneously. By 1987, this “program trading” accounted for about 10 percent of all buying and selling in the U.S. stock market and was making big profits for big players, such as university endowments and brokerage firms.

Then came Black Monday. On Oct. 19, 1987, investors worried about inflation and rising interest rates suddenly lost confidence in the market and share prices began to fall. Hundreds of program traders responded by hitting the sell button, and the Dow Jones industrial average took the largest one-day plunge in its history—508 points, or 22.6 percent. Within hours, commentators and regulators had fingered computer-assisted trading as the villain in the crash. The New York Stock Exchange swiftly adopted new rules to control program trading, and Congress even talked about making it illegal.

That was then. Today program trading stands at about 30 percent of weekly volume, according to the NYSE, which defines the practice as a bundle of trades involving 15 or more securities and worth more than $1 million. Pension funds, mutual funds and hedge funds all rely on computers to buy and sell big baskets of investments. 

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