Program trading and intraday changes in the S&P 500 Index are correlated. Futures prices and, to a lesser extent, cash prices lead program trades. Index arbitrage trades are followed by an immediate change in the index which ultimately reverses slightly. No reversal follows non arbitrage trades. The cumulative index changes associated with buy and sell trades and with arbitrage and non arbitrage trades all are similar. Price decompositions suggest that the results are not due to microstructure effects. Program trades in this 1989-90 sample do not appear to have created major short-term liquidity problems. The results are stable within the sample.
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Last revised 8/5/96.