Program Trading - If I am reading this right I think the author is confused about how program trading is now calculated. Sure a program trade is defined as a basket of shares of stocks traded that includes 15 or more issues and valued over $1 million dollars. However, for calculation purposes, and how the NYSE reports it, it is the number of shares in a program trade as a percentage of all shares traded.
For example; If you and I traded one share of stock it would count as one transaction. However the NYSE would count it as one share bought and one share sold. The share volume would be two to the NYSE. If that transaction was a PROGRAM trade, the old way of counting shares would have totaled two as the PROGRAM trade was responsible for both sides. In other words, the other side of the trade would have not taken place without the PROGRAM trade.
Now the NYSE calculates using just the one side of the trade for total PROGRAM trading volume. In my example above, if I initiated the PROGRAM trade, PROGRAM trade volume would be one while total NYSE share volume would remain two.
Here is how the NYSE explained it.
"PROGRAM Trading as a percent of NYSE volume was formerly calculated as PROGRAM buy volume + PROGRAM sell volume as percent of NYSE volume. A more accurate calculation would be PROGRAM shares bought, sold, and sold short as a percentage of NYSE shares bought, sold, and sold short." There is nothing in this definition that says anything about dollar volume.
Now, for PROGRAM trade volume they only count the total "PROGRAM shares" and compare that to all shares traded.
Again, of course my argument is the PROGRAM trade is responsible for the offsetting trade as well as it would have never existed without it. Using the new method PROGRAM trading would have only accounted for 10% or less of all shares traded prior to year 2000. In the 1987 crash it would have accounted for just 9% of all shares traded using the new method. Interesting that the SEC report after that crash said that PROGRAM trading was responsible for 17% of all shares traded. Notice that total volume is not changing with the new calculation. The folks that decided to use the old method years ago had it right. Now the NYSE is concerned that these much higher numbers will draw attention to the games the major member banks use increase substantially their profit from their proprietary trading units.
As a side note; Nasdaq had some volume issues back in the 90's as volume was calculated sometimes including the market makers buys and sells. In other words, if you wanted to sell(1) a share of stock the market maker would buy(2) it from you, then sell(3) it to someone else that would be recorded as a buy(4). Total volume of 4 on a one share sell. They fixed that.
BTW, I assume the above was written by Alan Newman. That surprises me. A couple years ago Alan and I exchanged a couple of emails on the program trading subject. Many don't know this but Alan did a paper back in the late 80's that was presented to Congress as I recall, that talked about the effects of program trading in the 1987 crash. It puzzles me where he got his information about dollar volume, and he is wrong.
Here's proof. Below is a link from the NYSE that shows historical program trading calculations using the new method as compared with the old. Notice how the new number are all now half of the old. That's is because they just now count one side of the trade. Any difference is due to rounding, or the specialist holding the one side as inventory (they don't do that much). If dollar volume was calculated in the old method, the numbers would be more all over the place in the weekly comparison. nyse.com
That said, program trading is much too high and has the potential of undermining our free market of stock trading.
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