Program trading, where computer algorithms buy and sell stocks on behalf of humans, has become a core component of the modern securities market. This method, which analyzes hundreds or thousands of stocks simultaneously and automatically executes buy or sell timings, is a key technique for enhancing the efficiency and speed of the stock market.
In literal terms, program trading is ‘stock trading conducted by computer programs.’ Trading commands are automatically executed when certain conditions or indicators are met. Since buy and sell orders are entered in real-time on the exchange, rapid decision-making and large-scale transactions are possible.
It is primarily used by institutional investors, while individual investors have limited access to it, though its impact on the overall market is substantial. In the past, human dealers calculated manually and placed orders via phone or keyboard, but now algorithms execute hundreds of thousands of orders every minute.
Program trading can be divided into two main categories. First, arbitrage trading seeks risk-free profits by utilizing the price difference between spot and futures. For instance, when a discrepancy occurs between the KOSPI200 Index futures and spot index, profits are pursued by selling expensive assets and buying cheaper ones. The timing of buys and sells is automatically determined by the program.
The second type is non-arbitrage trading, in which automatic trading occurs according to specific strategies or fund management standards. This type involves adjusting stock inclusion ratios or rebalancing, and does not realize actual profits.
Because program trading involves large and quick transactions, it has a considerable impact on the market. Especially when sell signals occur simultaneously, they can drive prices down. During the 1987 Black Monday, program trading acted as a catalyst, causing the U.S. New York Stock Exchange to experience a massive crash. In South Korea, the proportion of program trading has surged since the 2000s, leading to frequent market fluctuations during trading sessions.
To prevent market disturbances, the Korea Exchange enforces regulations related to program trading, such as the ‘pre-disclosure system’ and the ‘obligation to report arbitrage trading balances.’ Additionally, the ‘sidecar’ system, which suspends program trading for five minutes if KOSPI200 futures prices fluctuate by 5% or more, is directly related to program trading.
Recently, high-frequency trading (HFT) using artificial intelligence (AI) has been on the rise. This method seeks ultra-short-term profits by repeating trades in microseconds. It is more sophisticated and faster than program trading, with significant market impact.
While program trading is a tool that enhances market efficiency, it also has the potential to distort the market. Only through a balance of regulation and technology can stable market operations be achieved. As the automation of trading methods accelerates, understanding their structure and mechanisms is essential for all investors.
