Following the news that US broker Knight Capital has decided to close its global program trading business after just four months, GreySpark and Financial News discuss the progress that program trading has made.
Statistics produced by NYSE Euronext show the banks conducting the most program trades on its US market are the same today as they were in 2006. Program trading desks are clearly bearing the brunt of the downturn as margins have become weakened by a flurry of new entrants. Additionally, program trading now appears to be more of a complimentary service offered by banks, and less of a profit earner.
However, program trading has helped minimise the market impact of large transactions and, by using computer-driven techniques, reducing transaction costs, making it seem like a worthwhile practise.
GreySpark maintains that there are other features of this practice that make it attractive. Banks continue to operate program trading desks to engage in index arbitrage strategies themselves, which create inventories of stock.
These inventories are then used to house-fill client business or can be loaned out. Stock lending is a lucrative business in these volatile times , however stock inventories are required to make it a viable source of income.