Trade performance

Question 1

Four reference price benchmarks

Answer 1

1) Pre-trade benchmark

ref price known before trading begins (decision price, arrival price, previous close and opening price)

2) Intraday benchmark

market prices that occur during the trading period (TWAP and VWAP)

3) Post-trade benchmarks

ref price determined at end of trading day, or after trading (closing price)

4) Price target benchmarks

ref price that represents a more favourable price than the market price (perceived fair value)

Question 2

IS = Implementation Shortfall

Decompose IS

Answer 2

IS = Paper return - Actual return

Paper return - Shares wanted (closing price - decision price)

Actual return - Value of portfolio - cost of those shares (incl commissions)

• (shares bought * closing price) - (shares bought*execution price)

IS in bps = IS/(shares wanted x decision price)

Decompose IS:

1) Delay cost = shares bought(Arrival price - Decision price)
2) Trading cost = shares bought(Executed price - Arrival price)
3) Opportunity cost = share shortfall (Closing price - Decision price)
4) Fixed fees = shares bought x cost

Question 3

Market Impact cost vs Execution Risk

Answer 3

1) Market Impact cost
- trade too fast can cause adverse price movements & info leakage
- proxied by %ADV
2) Execution risk
- trade too slow and market moves adversely over trading horizon
- proxied by volatility levels

Question 4

TWAP vs VWAP?

as:

1) benchmark prices
2) scheduled algorythms

Answer 4

Both Intraday benchmark prices

VWAP - used when managers want to participate with volume, rebalancing over a day

TWAP - used when managers want to trade evenly & mitigate the impact of outliers and for markets with unpredictable trading volumes

Scheduled algorythms

relatively small orders in liquid markets for managers with less urgency & concerned with market impact cost so happy to trade over the day

Question 5

Market Adjusted Cost (bps)

Answer 5

Market Adjusted Cost (bps) = Arrival cost (bps) - (ß x Index Cost(bps))

Arrival cost (bps) = side x executed price - arrival price x 10 000

arrival price

Index cost (bps) = side x Index VWAP - index arrival price x 10 000

index arrival price

Question 6

Added Value - did the trader add value?

Answer 6

Added value (bps) = Arrival cost (bps) - estimated pretrade cost (bps)

negative = benefit