R34: Trade Strategy And Execution

Question 1

What are the motivations to trade?

Answer 1

1. Profit seeking
2. Risk management
3. Corporate actions/reconstitution/margin calls
4. Cash flow

Question 2

What are the trade strategy inputs?

Answer 2

1. Order characteristics (buy/sell, size, abs or relative of ADV)
2. Security characteristics (share, ETF)
3. Market conditions (market liquidity vs vol)
4. Risk tolerance (trade urgency)

Question 3

Trade execution strategies?

Answer 3

High touch
Automatic and DMA
Algo trading (profit seeking and execution)

Question 4

What are the different types of execution algorithms?

Answer 4

1. Scheduled (POV, TWAP, VWAP)
2. Liquidity seeking
3. Arrival price
4. Dark strategies
5. Smart order routers

Question 5

What are the different trade execution conventions for different markets?

Answer 5

See notes

Question 6

What are delay costs, trading costs, execution cost, opportunity cost, explicit cost

Answer 6

Delay: dec vs arrival
Trading: arrival vs ex
Execution: dec vs ex
Opp: unfilled - cancellation vs dec

Question 7

Transaction cost analysis formulas: arrival cost, index cost, market-adjusted cost, added value?

Answer 7

See notes

Question 8

Good practice for trade governance?

Answer 8

Define best execution
Optimal order
Eligible brokers and venues
Monitoring of execution arrangements