Program Trading andIntraday Volatility
Lawrence HarrisUniversity of Southern California

George SofianosJames E. ShapiroNew York Stock Exchange, Inc.


Program trading and intraday changes in the S&P500 Index are correlated. Future prices and, to alesser extent, cash prices lead program trades.Index arbitrage trades are followed by an immediate change in the cash index, which ultimatelyreverses slightly. No reversal follows nonarbitragetrades. The cumulative index changes associatedwith buy-and-sell trades and with arbitrage andnonarbitrage trades all are similar. Price decompositions suggest that the results are not due tomicrostructure effects.


Conclusion

Program trading is related to intraday changes in the S&P 500. Therelation primarily seems to be due to the initiation of program tradesin response to new information. To a lesser extent, the relation isalso due to bid-ask bounce and the updating of stale prices causedby program trades. Since little or no average price reversal occurs in the 30 minutes after program trades, program trades do not seem tocause excess volatility.

Appendix: The Program Trading Data