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Competitive Bids for Principal Program Trades

Summary: Competitive Bids
for Principal Program Trades
Robert Almgren
Neil Chriss
March 14, 2003
1 Introduction
A program trade involves the sale or purchase of a basket of stocks that is too
large to be traded immediately in the market. When such trades are brokered
they take one of two forms. In an agency trade the broker executes the trade
on behalf of the client on a commission basis, and all the risk of the trade
is borne by the client. In a principal trade, also called a principal basket,
principal bid or risk bid, the broker directly purchases the entire basket for
a fixed price, usually expressed as as a discount to fair market value. By
design, principal trades transfer all of the risk from the client to the broker
in exchange for a single price, which therefore proxies for the market price of
risk for the portfolio.
Program trading represents an increasing percentage of overall stock mar-
ket volume. In 2002 program trades averaged over thirty percent of New York
Stock Exchange trading volume, up from approximately twenty percent in
1999 and 2000. Over fifty percent of all program trading volume took place


Source: Almgren, Robert F. - Courant Institute of Mathematical Sciences, New York University


Collections: Mathematics