Program trading is a technique for trading stocks as a group, rather than individually. Strategies implemented through program trading include stock index arbitrage, portfolio insurance and equity allocation shifts within an institutional portfolio.

Stock index arbitrage involves buying (selling) futures contracts and selling (buying) the stocks in the underlying index when futures are cheap (rich) relative to fair value. There is no net effect on market prices in excess of that needed to close the spread between fair and actual values.

Portfolio insurance programs attempt to reduce or eliminate portfolio losses while allowing for upside gains. When implemented through options, portfolio insurance requires no further trading once the option is in place and does not destabilize prices. Portfolio insurance implemented through stocks or stock index futures, however, requires selling as stock prices decline and buying as stock prices increase—reinforcing market movements.

Portfolio insurance may thus be considered part of a class of strategies called “momentum” strategies. These tend to maintain and accelerate market movements. Ranged against momentum strategies, and tending to maintain fundamental equilibrium values, are “value-based” strategies, which tend to buy after stock price declines and sell after rises. The balance between the funds allocated to momentum and value-based strategies and the speeds with which the two types of strategy are implemented have implications for market value and volatility. It appears that momentum strategies currently enjoy shorter lags in implementation than value-based strategies, lending an element of instability to the market.