Program Traders: They're Back, Without The Bad Vibes

When program trading came into vogue in the mid-1980s, it was at the forefront of Wall Street's computer revolution--and its practitioners included the Street's largest and most luminous brokerages. Merrill Lynch, Morgan Stanley, Dean Witter, Bear Stearns, and Salomon Brothers all profited mightily from the most controversial form of program trading, index arbitrage. By exploiting momentary price differences between index futures and underlying stocks, these firms designed a nearly riskless money machine. The only drawback, it seemed, was persistent criticism that such rapid-fire trading made the market too volatile.

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