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May 16, 2007

NYSE Recasts Definition Of Program Trades

By Nina Mehta

Program trading's share of the New York Stock Exchange's volume is likely to decline following a Big Board revision of the definition of a program.

The New York currently defines a program trade as a "coordinated trading strategy" involving the purchase or sale of 15 or more stocks valued at $1 million or more.

That definition is "overbroad" and "has led to regulatory confusion," the NYSE said in a March rule filing with the Securities and Exchange Commission. In particular, it noted, many automated and algorithmic trades are unnecessarily included as programs.

Going forward, the Big Board plans to define a "coordinated" strategy as an execution of 15 or more stocks as part of a "single investment strategy" in which "the execution of the securities within the portfolio is linked, as opposed to being merely coincidental."

The exchange's new rule will also eliminate the requirement that a program trade have a value of at least $1 million.

Under the new regime, portfolio volume-weighted-average-price trades and pairs trading will no longer automatically qualify as programs. Index arbitrage will still constitute program trading.

Since the beginning of this year, programs have typically accounted for between 27 and 32 percent of all shares traded at the New York, according to weekly reports. That's half the level it was a year ago, when the NYSE switched the way it calculates its program trading figures.

In mid-2006 the exchange began calculating the percentage of program trades as the sum of shares bought, sold and sold short in programs divided by the sum of shares bought, sold and sold short on the NYSE, including its crossing sessions. Previously, the denominator was the exchange's total reported volume.

The NYSE adopted the current definition of program trades in 1988, in the wake of the 1987 stock market crash, as part of an effort to identify large automated programs. The calculation of program trades has been updated several times.