Electronic Trading

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Today there are just two equity traders left. Automated trading programs have taken over the rest of the work, supported by computer engineers. The experience of its New York traders is just one early example cash vs program trading a transformation of Goldman Sachs, and increasingly other Wall Street firms, that began with the rise in computerized trading, but has accelerated over the past five years, moving into more fields of finance that humans once dominated.

Chavez, who will become chief financial officer in April, says areas of trading like currencies and even parts of business lines like investment banking are moving in the same automated direction that equities have already traveled. Today, nearly 45 percent of the revenue from cash equities trading comes from electronic trades, according to Coalition, cash vs program trading U.

In addition to back-office clerical workers, on Wall Street machines cash vs program trading replacing a lot of highly paid people, too. For the highly paid who remain, there is a growing income spread cash vs program trading mirrors the broader economy, says Babson College professor Tom Davenport.

Now more complex areas of trading like currencies and credit, which are not traded on a stock exchange like the New York Stock Exchange but rather through less-transparent cash vs program trading of traders, are coming in for more automation as well. Goldman Sachs has already begun to automate currency trading, and has found consistently that four traders can be replaced by one computer engineer, Chavez said at the Harvard conference.

Next, Chavez said, will be the automation of investment banking tasks, work that traditionally has been focused on human cash vs program trading like salesmanship and building relationships. Reducing the number of investment bankers would be a great cost savings for the firm.

Chavez himself is an example of the rising role of technology at Goldman Sachs. It was nurtured cash vs program trading a small startup within the firm and launched in just 12 months, he said. Long after the training data has been deleted, the models can continue being improved and used to influence future voters.

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Program trading is a type of trading in securities , usually consisting of baskets of fifteen stocks or more that are executed by a computer program simultaneously based on predetermined conditions. Several factors help to explain the explosion in program trading. Technological advances spawned the growth of electronic communication networks.

These electronic exchanges, like Instinet and Archipelago Exchange , allow thousands of buy and sell orders to be matched very rapidly, without human intervention. In addition, the proliferation of hedge funds with all their sophisticated trading strategies have helped drive program-trading volume. As technology advanced and access to electronic exchanges became easier and faster, program trading developed into the much broader algorithmic trading and high-frequency trading strategies employed by the investment banks and hedge funds.

Program Trading is a strategy normally used by large institutional traders. Barrons shows a detailed breakdown of the NYSE-published program trading figures each week, giving the figures for the largest program trading firms such as investment banks. Index Arbitrage is a particular type of Program Trading which attempts to profit from price discrepancies between the basket of stocks which make up a stock index and its derivatives such as the future based on that index.

The "premium" PREM or "spread" is the difference between the stock index future fair value and the actual index level. As the derivative is based on the index, the two should normally have a very close relationship.

If there is a sufficiently large difference the arbitraging program will attempt to buy the relatively cheap level whether that is the basket of stocks which make up the index or the index future and sell the relatively expensive product, making money from the price discrepancy. The fair value calculation takes into account the time to expiration of the future contract, the dividends received from holding all the stocks, and the interest cost of buying the stocks.

From Wikipedia, the free encyclopedia. Concise Encyclopedia of Economics 1st ed. Library of Economics and Liberty. Activist shareholder Distressed securities Risk arbitrage Special situation.

Algorithmic trading Day trading High-frequency trading Prime brokerage Program trading Proprietary trading. Arbitrage pricing theory Assets under management Black—Scholes model Greeks finance: Vulture funds Family offices Financial endowments Fund of hedge funds High-net-worth individual Institutional investors Insurance companies Investment banks Merchant banks Pension funds Sovereign wealth funds.

Fund governance Hedge Fund Standards Board. Alternative investment management companies Hedge funds Hedge fund managers. Retrieved from " https: Views Read Edit View history. This page was last edited on 8 September , at By using this site, you agree to the Terms of Use and Privacy Policy.