What is Programmed or Algorithmic Trading?

Program trading is casually defined as the use of computers in stock markets to engage in arbitrage and portfolio insurance strategies.

The term has also been defined as “a wide range of portfolio trading strategies involving the purchase or sale of 15 or more stocks having a total market value of $1 million or more” without any direct reference to the use of computers. The word “program” can be interpreted in its earlier, more general meaning of a defined and pre-arranged sequence of steps, rather than specifically a computer program.

In recent times, there has been a subset of program trading called algorithmic trading. This is when a computer program takes a large order, breaks it up into small pieces (typically 100-300 shares per piece), and gradually submits these pieces to the market.

The goal is to complete the order without other market participants realizing that a large trade is in progress, because they would change their behaviour (and thus the price) to the detriment of the program trader if they recognized a large trade.

See this Wikipedia page for more details