Portfolio Trading or Program Trading is the process of trading a basket of stocks in large volumes with the use of computer-generated algorithms. Once the algorithm is set and running, the program begins to generate trades. Rules on Portfolio Trading
- Maintain the portfolio or the basket’s integrity
- Maintain control of the trade
- Route orders
- Trading a diversified portfolio of financial instruments lessens trading risks.
- Institutions trade a higher fraction of equity at present and using portfolio trading allows trading in diversified strategies.
- Advancement in technology led to reduced costs, which makes portfolio trading more efficient.
- Principal Trading
- Agency Trading
- Basis Trading
- Adverse Selection – when the counterparty knows more about the stock they sell than the buyer
- Market Impact – trading large-volume stocks generally result to market impact. As prices go down when selling stocks, conversely, prices go up when buying stocks.
- Volatility Exposure – as the market price of a security fluctuates by the minute, it means the uncertainty of the price of the portfolio is at risk.
Put your knowledge into practice
Choose the financial instrument that suits you