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Program Trading Upheaval

Traders Magazine, June 2003

John A. Byrne Editor

In these hard times, sellside trading desks are angry at how the regulators have turned the business upside down. It came with a series of dramatic shocks, which included the move to decimal pricing. The idea was to improve the market for retail investors. Some might think the buyside, which has a fiduciary duty to millions of retail investors, would be pleased. Actually, some buysiders are probably shellshocked. Levelling the playing field has had a cost. Some buyside pros, catching up with the resulting changes, have been humbled. So they have turned to program trading, and a category of it called portfolio trading. Unfortunately, this trend could transform some buyside pros into glorified order clerks. And it is no laughing matter. The historical growth in mutual fund investing has contributed to an upsurge in program trading. But another reason for this trend is the excessive drive to transform Wall Street into a sport dictated by popular vote. The commission rates in program trading are bargain basement and the executions are efficient. It is also productive for profit-squeezed sellside desks. On some days, portfolio trading accounts for about 40 percent of volume on the New York Stock Exchange, up from five percent in 1992. However, there is a slightly sour note in all of this. The growing use of these algorithmic-driven orders - essentially the purchase or sale of at least 15 individual stocks in one trade - is enough to alarm some buyside traders.

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