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Trading > Trade Strategy and Execution > Flashcards

Trade Strategy and Execution Flashcards

1
Q

trade motivation

A

(1) Profit seeking
(2) Risk management and hedging needs
(3) Cash Flow needs
(4) Corporate actions, margin calls, and index reconstitution

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2
Q

2 considerations of Profit seeking trading motivation

A

(1) Rate of alpha decay (higher rate -> shorter time frame -> trade urgency
(2) Minimize information leakage (alert the market to the security
mispricing through their trading activity)

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3
Q

kind of rate of alpha decay

A

(1) trade on daily news flow
–> higher alpha decay rate
–> higher trade urgency
(2) trade on long-term fundamentals
–> lower alpha decay rate
–> lower trade urgency

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4
Q

the aim of Risk management and hedging needs

A

(1) To maintain target risk exposure
(2) Rebalance after change in market conditions (targeted duration)
(3) Remove risk factor from a portfolio (hedge FX exposure)

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5
Q

Trading Strategy Inputs

A
  1. Order Characteristics
  2. Security Characteristics
  3. Market Conditions
  4. Individual risk aversion
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6
Q

Order characteristic

A

(1) Side (buy, sell, short buyback (cover), or short sell)
(2) Absolute size (quantity)
(3) Relative size (% of ADV)

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7
Q

alpha decay

A

Alpha decay is deterioration in alpha once an investment decision has been made.

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8
Q

TWAP

A

+ Time-weighted average price
+ TWAP ignores volume
+ appropriate for managers who wish to remove the impact of outliers

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9
Q

VWAP

A

+ Volume-weighted average price
+ average price of all trades, weighted by volume
+ use when they want to participate with volume patterns over a day
+ achieve the objective of using the cash received from sell orders to fund buy orders of the rebalancing

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10
Q

Arrival price

A

price of the security when the order is sent to the market for execution

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11
Q

Scheduled algorithms

A

execute trades using rules driven by historical volumes or specified time period
Charateristics:
+ High liquidity
+ Small order
+ low urgency
Include:
+ Percentage of volume algorithms
+ Time slicing algorithms

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12
Q

Liquidity-seeking algorithms

A

take advantage of favorable liquidity conditions when offered by the market
Charateristics:
+ low liquidity
+ High urgency
+ High size order
+ Infor leakage concern
Eg: wait large order appeared -> enter BUY

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13
Q

Arrival price algorithms

A

seek to trade close to market prices prevailing at the time the order is entered

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14
Q

Dark strategies/liquidity aggregators

A

+ execute trades in dark pools,
+ with aggregator algorithms attempting (aggregator algorithms: thuật toán tổng hợp)
+ optimize trading across multiple dark venues.

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15
Q

Smart order routers (SORs)

A

+ algorithms
+ determine the best destination (either lit or dark) to route an electronic order to lit/dark or both (the market must have both lit & dark)
+ get the best result

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16
Q

dark pool

A

+ is a privately exchange for trading securities.
+ allow institutional investors to trade without exposure until after the trade has been executed and reported

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17
Q

High-touch approach

A

+ involve high levels of human involvement
+ required for large trades (known as block trades)
+ Use in less liquid market
+ >< Electronic trading
+ 2 types of high-touch approach (base on who assumes the risk of trading the order):
* principal trades (broker take risks related exercute):
* agency trades (broker only lam trung gian)

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18
Q

direct market access (DMA)

A

+ allows buy-side portfolio managers/traders to access the order book of the exchange directly through a broker’s technology infrastructure.
+ used more for futures than for options

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19
Q

request for quote system

A

systems used by investors to request prices from dealers in less liquid quote-driven markets
VD: các lô TP rất lớn, khi bán thì request người mua trả giá trước rồi mới bán

20
Q

opportunistic algorithms

A

= Liquidity-seeking algorithms

21
Q

Dark strategies/liquidity aggregators

A

execute trades in dark pools, with aggregator algorithms attempting to optimize trading across multiple dark venues

22
Q

Execution cost

A

Execution cost = ∑sjpj−∑sjpd = Trading cost + Delay cost
+ Delay cost = (Price at time PM decision - Arrival Price) x Volume
+ Trading cost = (Aver Price - Arrival cost) x Volume

23
Q

implementation shortfall

A

IS = paper return − actual return

24
Q

market-adjusted cost

A

arrival cost (bps) − β × index cost (bps)

25
Q

arrival price

A

the price when the order is sent to the market for execution

26
Q

principal trade

A

+ Include:
* Quote-driven market
* OTC Market
* Off-exchange market
* Request-for-quote market
+ Use in: gov bond, currency fx,…
+ Characteristics: the broker assume that the risk related trade pricing into her quoted spread.

27
Q

execution risk

A

+ the risk of an adverse movement in a share price in the time it takes to execute an order
+ proxy: price volatility
+ reduce: use liquidity securities

28
Q

Market impact

A

is the adverse movement in price caused by submitting an order to the market and forcing prices up as a buyer, or down as a seller

29
Q

4 types of reference price

A

(1) Pretrade benchmarks (known before trading) include: decision price, arrival price, previous closing price, opening price
(2) Intraday benchmarks: price during trading period: include VWAP, TWAP
(3) Posttrade benchmark: determine after the trade complete
(4) Price target benchmark: use by profit seeking manager, earn short term alpha

30
Q

5 types of trading strategy selection

A

(1) Short term alpha
+ Objective: ST alpha earning in liquidity market
+ Urgency: high
+ reference price: arrival price benchmark
+ execution method: Algorithm
(2) Long term alpha
+ Objective: trade in LT earning due to change in fundamental condition
+ urgency: low
+ reference price:
+ exe method: sell in gradually small part to avoid infor leakage
(3) Risk rebalance
+ Objective: rebalace or hedge risk exposure
+ Urgency: low
+ Refn price: TWAP
+ execution method: Algo
(4) Client redeemtion trade
+ Objective: liquidate to meet client redeemtion needs
+ urgency: at the end of day
+ ref price: closing price
+ Exe method: VWAP
(5) New trade mandate
+ Objective: invest new client fund
+ urgency: by client -> urgen
+ Ref price: closing price
+ exe method: immediate

31
Q

3 types of trade implementation choices

A

(1) High-touch approaches: involve high levels of human involvement
(2) Electronic trading: involves trading via computer and is used in more liquid markets.
(3) Algorithmic trading: is the use of programmed rules to electronically trade orders

32
Q

DMA appropriate for ?

A

(1) small trade (2) in liquid electronic markets

33
Q

Decision price = 20 with size = 50.000
Arrive price = 20.1, purchase success with 40.000, average price = 20.34
close price = 20.55
Trading fee = 0.02

A

+ Delay cost = 40.000 x (20.1 - 20) = 4.000
+ Trading cost = 40.000 x (20.34 - 20.1) = 9.600
+ Oppotunity cost = 10.000 x (20.55 - 20) = 5.500
+ Fee: 40.000 x 0.02 = 800

34
Q

added value of function

A

added value (bps) = arrival cost (bps) − estimated pretrade cost (bps)

35
Q

what type of algorithm help trade:
+ minimize the trade’s market impact
+ avoid conveying information to market participants

A

Schedule Algorithm

36
Q

Function of arrival cost (bps)

A

Arrival cost = Side x (Aver Price - Arrival Price)/ Arrival Price x 10.000

37
Q

incentive to take risk (mock test)

A

Related to management fee
PM try to get more risk to enhance return to have more probability to get high return

38
Q

Function of Opportunity cost

A

= The volume fail x (The plan profit before trading)

39
Q

paper return

A

hypothetical return that the fund would have received
if the manager were able to transact all shares at the desired decision price and without any associated costs or fees

40
Q

the trader receive the order from PM for 1,000 share at 10:00, when its price is $30
the trader request order in the market, calculate the delay cost in case of the price is $29.9 and $30.1

A

+ in 29.9, delay cost = 29.9 - 30.0 = -0.1
+ in 30.1, delay cost = 30.1 - 30.0 = 0.1

41
Q

Delay cost: the reason and the solution ?

A

The reasons:
(1) The trader is not familiar with RLK and needs to review, include:
+ liquidity
+ volatility
+ intraday trading patterns
+ current market conditions
(2) The trader need to review the historical performance of brokers trading similar order sizes and trading characteristics
The solutions: by having proper trading practices in place to provide traders with all the information they need to make an immediate decision, such as pre-trade analysis and post-trade analysis

42
Q

Opportunity cost: the reason and the solution ?

A

The reasons: insufficient market liquidity
The solutions: Opportunity cost can be reduced by knowing the order size and share quantity that is most likely to be executed in the market within a specified price range

43
Q

Trading cost: the reason and the solution ?

A

The reasons: insufficient market liquidity
The solutions: selecting the proper price benchmarks and trading urgency

44
Q

window dressing

A

manipulate financial statement

45
Q

agency trade

A

+ the broker is engaged to find the other side of the trade but acts as an agent only
+ risk for trading the order remains with the buy-side portfolio manager or trader.

46
Q

dark pool must not be report ?
A. correct
B. Incorrect

A

B. Incorrect because it must not be report before transaction, but must be report after transaction

47
Q

Lit market must be report when ?
A. pretrade
B. After trade

A

A. Pretrade

Trading (4 decks)

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