Definition
Basket Trading
Basket trading is the buying or selling of a predefined group of securities together in proportions that match a target portfolio, index, or hedge, executed as one logical order.
On Indian platforms, a basket order lets a trader define multiple instruments with quantities and fire them in one action, useful for index replication, pairs trading and option strategy legs. Brokers and exchanges provide basket-order functionality so the legs go out near-simultaneously, limiting leg risk.
For ETFs, basket trading is fundamental: the authorised participant assembles the creation basket of underlying stocks to exchange for ETF units. Quant desks also use baskets to express factor or sector views and to hedge a portfolio's market exposure in a single trade.
Related terms
- Program TradingProgram trading is the simultaneous, automated trading of a large basket of stocks as a single coordinated order, typically used by institutions to execute index-like exposures or rebalances efficiently.
- Pairs TradingPairs trading is a market-neutral strategy that goes long one security and short a related one when their historical price relationship diverges, betting that the spread will revert to its mean.
- ETF Creation/RedemptionCreation and redemption is the primary-market mechanism by which authorised participants exchange a basket of underlying securities (or cash) for new ETF units, or hand back units for the basket, keeping the ETF price aligned with its NAV.
- Basket OrderA basket order lets a trader group multiple securities with defined quantities and order types into a single saved set that can be reviewed and fired together in one action.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.