A basket trade is any trade that is performed for a set of 15 or more different shares or other securities, usually as a set proportion of those shares. Basket trades are most commonly used by institutional investors to maintain a proportionate portfolio of different shares or to purposefully alter the proportion of the shares in that portfolio.
Basket Trades and the Rise of Exchange Traded Products
The rise of exchange traded products, such as ETFs and ECNs, has led to a much larger number of basket trades in contemporary markets. These products offer investors exposure to certain market features by using a proportionate portfolio of different securities.
This leads to a large number of basket trades, as these exchange traded products maintain the proportion of securities in their portfolio while they increase and decrease in size.
Basket Trade and Day Trading
The rise of exchange traded products and basket trades has created additional opportunities in the market for day traders. Exchange traded products are intended to offer a specified exposure for investors, and not to create an internal profit. Therefore, they make basket trades automatically without thought to timing the market.
This leads to the potential for additional volatility and momentum in contemporary markets, as the number of automated funds trading large blocks of shares has increased dramatically. Day traders can use the existence of these basket trades to profit from the rapid liquidations or acquisitions that occur alongside major shifts in relevant markets.
While most day traders themselves will never perform a basket trade, the prevalence of automated basket trades in contemporary markets has created a number of additional opportunities for day traders.
Exchange traded products in particular represent a significant source of additional volatility and momentum in contemporary markets due to their widespread use of basket trades.