Word: trader
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Giella captained a Bulldog team which limped home to a 1-9 mark. Now working as a corporate bond trader in a New York brokerage house, Giella saw his team's chances to salvage the 1983 season ruined when the Crimson downed the Elis, 16-7, in The 100th Game...
That capability gave rise about three years ago to a particularly canny and complex form of program trading. It is a kind of arbitrage in which traders make lightning transactions to take advantage of fleeting discrepancies in the prices of related financial instruments in different markets. One of the most popular such plays involves the Standard & Poor's 500 index, which rises and falls according to the performance of 500 stocks. A program trader will use a computer's calculating ability to monitor constantly the difference between the level of the S&P index and the price...
...futures price, since it registers the market's expectations of where the actual S&P stocks are heading, often veers substantially above or below the current level of those stocks. When the futures price strays far enough from the real index, it creates a golden door for the arbitrage traders. They play both sides of the gap, knowing they will make money on the difference. For example, if an arbitrager sees the S&P futures price rising well above the S&P stock index, the trader would buy a package of the 500 stocks that make up the index, which...
Prices could swing up or down before the contract is settled on its expiration date, but because of the original gap in prices, the trader has already locked in a profit, often called synthetic cash. If stock prices rise, the arbitrager will make a handsome return upon selling the shares; the money lost on the futures side of the transaction will not be enough to offset the profit because the price at which the futures were sold was overly high to start with. In the opposite scenario, falling stock prices will cause the trader to lose money on the stocks...
...volume of shares involved in the wild cycles of program trading -- lots of more than 500,000 at a time for each trader are common -- has become the "tail that wags the dog," says Manhattan Investment Manager Soros. Observes Louis Holland, a partner in the Chicago investment firm of Hahn Holland & Grossman: "The little guy in the street is very concerned about all this perceived volatility. He doesn't think he has a chance...