What is the Origin of Program Trading?

We knew that contract to cash arbitrage (a very basic type of futures trading), would occur even before the S&P Futures began trading in 1982.  The concept of a futures contract trading above or "at a premium" to the actual price of the underlying cash commodity was well known at that time.  We knew that the S&P Futures would trade "at a premium" to the underlying stocks in the S&P 500 Index and that sometimes that premium (now known as PREM ) could get way out of line.  So much so that we could buy the stocks in the S&P 500 Index and sell the S&P Futures at the same time and make a profit on the difference in the prices.   That type of program trading is now known as Index Arbitrage.

Once the S&P Futures contract began trading, we began plotting the PREM in real time and could instantly see whenever that PREM did move a lot and got way out of line.  When it did, we could instantly see the results of PREM as the INDU moved quite a few points in only 4 or 5 minutes.

So it was very easy to write a computer program to track the PREM and then instantly make the trades we needed to make.

We have continued to track the PREM tick by tick since 1982.

Click here to contact us

 

 

Related entries:

To print this FAQ click here Print FAQ