Burst Basket

A burst basket refers to the transaction that executes the sale or purchase of a group of stocks, known as a basket. A basket is essentially an entire portfolio of stocks from different sectors. This portfolio of stocks is aggregated into a single trading unit, the basket. Baskets typically contain at least five stocks. They are commonly used in index tracking and currency portfolio management. Baskets are traded on both the NYSE and the CBOE for institutions and index arbitrageurs.

The term "burst basket" is used in reference to the actual execution of a trade of a basket of stocks, particularly in conjunction with execution used in program trading. Program trading refers to trading done through the use of mathematical algorithms to buy or sell securities. Burst basket trades may also be done outside of a program trade by a specialist. The floor specialists would trade the component stocks in order to buy or sell the specific basket of stocks.

Index mutual funds and exchange traded funds (ETFs) are examples of tracking funds, which are managed to closely track the performance of a stated index. For example, the SPDR S&P 500 ETF (SPY) is built to track the performance of the S&P 500 index. One downside of an index mutual fund or ETF is a lack of flexibility or customization. When you purchase these instruments, you are not able to make any changes to the holdings within them. You get the stocks and sometimes derivatives that the instrument holds, and cannot pick and choose what you personally would change about the holdings. With a basket trade, you have some flexibility to tweak the basket of stocks to favor one company or industry over another. When it comes to the question of flexibility to customize a portfolio's holdings, baskets have the advantage. However, mutual funds and ETFs may have advantages in expense and tax efficiency.

Learn more about index mutual funds and exchange traded funds here.