Trading against the programs sounds like a grade B horror movie. This thought comes to mind after reading an announcement by UBS AG that they have hired someone away from a competitor in order to “manage electronic stock-trading products.” The press release goes on to say the employee will be global head of direct execution product management, be responsible for the broker’s platform for trade analytics, and be responsible for a customer centered order execution program. In this person’s previous work they specialized in “automated and high-volume electronic trading strategies.” This announcement is a reminder that whether individual traders are day trading the politics, trading catchups, or scalping versus momentum trading they are always, at some level or other, trading against the programs.

Programmed trading exists because e-trading exists. E-trading, or electronic trading, reduces the cost of transactions through automation, improve liquidity, increased competition in the brokerage industry, improved transparency, and made for tighter bid ask spreads. All of this helps the retail investor. However, the ability to trade electronically opens the door to programmed, or algorithmic, trading. While e trading can give the trader quicker access to trades with a greater chance of fast execution it can also leave the trader in the dust, by microseconds, in split second reaction and execution when trading against the programs. Algorithmic programs with their build in technical analysis are set to respond to market changes and react automatically. The signals may be the same that the trader sees on a trade station but when the trader is thinking for a second before executing the trade he or she is a second behind in trading against the programs. If the programmed trading is in small volume it may not make much of a difference. However, if very heavy programmed trading by one computer sets of a programmed response by another programmed computer it may change the dynamics entirely for trading an equity.

A trader may decide in trading Toyota that an announcement by the company does not go far enough and will lead to a consumer backlash. While the trader is analyzing the situation and planning the trade an algorithmic program may have already taken input from a program manager, finished its analysis, and executed the same trade but in huge volume. The market has now changed and the trader will need to re-analyze before trading. In the meantime, in the grade B movie nightmare programmed trading as taken the market either higher or lower than might have happened with trading at a more rational pace. Some have blamed the New York Stock Exchange 1,000 point drop in a day, “Flash Crash” of May 6, 2010, on programmed trading. When programmed trading goes crazy one is reminded of the old saying that programming a computer is like training a dog only that a dog is smarter! The advantage that the human trader has when trading against the programs is that he or she can get out and stay out of a trading situation if the situation seems crazy.

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