Shorts, Program Trading and Surgical Airstrikes

The last two sound good but aren't as orderly as they might appear.
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At the opening of the market this morning, you could have knocked the Nasdaq over with a finger. Every key stock looked to be in free-fall. The frenetic flashing of red on my main screen gave all of the appearances that we were about to have one nauseating, stomach-churning day for the bulls.

And then it ended. Just like that. The flickering died down and then stopped. The selling, so intense that it could have scared even

Joe Battipaglia

, but then only for a second, disappeared. What happened?

A program had hit the market. Some program that was meant to lock in some gains, or take something off the table. The selling you saw was derivative-related. As soon as it hit the market, piggy-backing traders and hedge funds piled on with put buys in all of the usual Nasdaq suspects. They thought they could get their shorts on and cover lower later.


Let me just say for a moment that I hate the word program. Maybe from the days when I was an athlete, when I think of program, I think of something I was supposed to get with. The program represented the order, the rule, the way it had to be. You didn't deviate from the program.

In stocks, the word program is completely misleading. Programs are organized chaos. They are like surgical airstrikes. It sounds real good, but there is nothing surgical about it.

When a program hits the market, all that means is someone has attempted to do something that the market could not handle, or "get with." Someone gave an order to try to sell $200 million worth of Nasdaq stocks, say, in a minute and a half. We call it a program, because for the client it is indeed a program. He gets his proceeds no matter what.

But he leaves the rest of us with chaos as we all, the bystanders, watch our markets buffeted about by a sell (or a buy) that occurs too rapidly to find buyers. So you get that herky-jerky psychedelic red flashing that makes you feel as if you just stood up on Space Mountain. (And if you did, can you look for my glasses that I lost there two years ago?)

The "in" of the program, the futures part, is surgical. The "out," the equity spilloff, is what you saw in the opening minutes of trading. When it is over and the selling is done it is discrete and goes away because it is client-based, not fundamental-based. (Maybe the client is going to the Cape. Maybe the client is locking in an up 25% year. Maybe the client was fired and a new guy came in. Who the heck knows?) The aftermath, the NDX rally, comes from wise guys who bet that the program was not over or was just getting started, the variable nobody knows except the client and his representative.

They got trapped; they probably had to cover. Remember, they were shorting without an edge. They were just betting against a client order. You can't start fomenting a reason to be short after you are short. So you cover.

And that's probably why the Nasdaq, in the end, went up. Not much more to it.

James J. Cramer is manager of a hedge fund and co-founder of Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending an email to