[Derivative ABC] What Are Program Buying and Selling?

On the 11th, when the KOSPI index surpassed the 2,400 mark for the first time in 2 years and 2 months, dealers were working in the dealing room of Hana Bank in Euljiro, Seoul. Photo by Mo Honam munonam@

[Asia Economy Reporter Jihwan Park] 'Program trading' is one of the stock investment methods that has existed for a long time. It is carried out according to a computer program set to automatically place sell or buy orders when certain conditions are met.

It is mainly conducted on KOSPI 200 stocks, which are concentrated with blue-chip stocks, and is divided into arbitrage trading (index arbitrage trading) and non-arbitrage trading. Institutional or foreign investors with strong financial power who trade large volumes of multiple stocks use it as a hedging (risk avoidance) tool.

The decision to sell or buy is made directly by the trader, but all other processes are automated by the system.

Index arbitrage trading involves simultaneously buying and selling spot and futures in opposite directions, allowing traders to reduce risk and pursue stable profits when temporary price differences occur between spot and futures items. On the other hand, non-arbitrage trading refers to trading a basket of spot stocks without linking to futures.

Institutional investors often trade large volumes of 20 to 30 stocks that have a significant influence on the index, so program trading has a considerable impact on the composite stock price index.

In particular, in index arbitrage trading, when futures are sold and spot stocks are bought, and then futures are bought and spot stocks are sold at a certain point to realize profits, the stock price index may plunge sharply due to concentrated selling of spot stocks.

In the case of non-arbitrage trading as well, when previously purchased program buy volumes are suddenly dumped into the stock market, it can cause a decline in the stock price index.