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Technology Stocks : Ascend Communications (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: Joseph Colombo who wrote (41047)	3/25/1998 4:59:00 PM
From: Sowbug	Read Replies (1) \| Respond to of 61433

What BUY/SELL programs are they talking about? A buy/sell program is a computer-directed set of instructions to buy or sell large blocks of securities. They're a little like instant arbitrage because they take advantage of tiny disparities between stocks that belong to popular indexes and futures traded on those indexes. Example: A computer monitors the price of all 500 stocks making up the S&P 500, computes what the index should be based on those actual prices, and compares it to the current difference between that ideal index value and the value of futures traded on the S&P 500 Index. It turns out the futures are implying a fair value above the current cash value. So the program kicks in and orders the purchase of the stocks and the sale of the futures. Eventually the stock prices catch up with the futures (i.e., they go up), or vice versa (futures go down), or both. Multiply this by many hundreds of thousands of dollars/trades/times and you have a money-printing machine in your program trader. It's a little like a dog running after a cat in a wide open field. The cat will swerve back and forth, and the dog will lag a bit, but overall they're pretty much synchronized. I actually tried this in order to understand program trading. No, not really. When the market gets too frothy, the gap between future & cash prices potentially gets too big, and the synchonization might fall apart. That's when program trading is dangerous -- it accentuates any panic in a very unpredictable way. Ergo, the program trading curbs at +/- 50 DJIA points. I don't know how to tell when programs are in effect, but if you see a sudden intraday drop in the DJIA and the president hasn't just been shot, you can safely blame program trading.