Trade Strategy & Execution

Question 1

Four Categories of Trade Motivations

Answer 1

1) Profit-seeking: hunting alpha, for active PMs seeking to outperform benchmark –> alpha decay is a big consideration (deterioration of alpha once decision made by PM –> high urgency)

2) Risk Management / Hedging –> maintain target risk exposure –> can use rebalancing, derivatives

3) Cash Flow Needs –> primarily caused by investor subscriptions (in) and redemptions (out) from the fund –> big for mutual funds; also mitigating cash drag for hedge funds other less liquid invmts

4) Corporate actions, margin calls, index reconstitution: also divs and coupons may need reinvesting, regular distributions from index funds, etc

Question 2

Way to reduce delay costs

Answer 2

conduct pre trade and post trade analysis to give trader an idea how to better make fast decision on what the best trading strategy is

Question 3

How to game the VWAP Strategy

Answer 3

trader can wait until the ask price is LESS than the VWAP

Question 4

Delay Cost

Answer 4

arrival price - decision price

Question 5

Trading Cost

Answer 5

AKA mkt impact cost –> price movement between arrival and when orders actually executed

Execution price - arrival price

Question 6

Market Adjusted Cost

Answer 6

EXAMPLE BELOW

Mkt adjusted cost (bps) = arrival cost (bps) - Beta x Index cost (bps)

Arrival Cost (bps) = (avg execution price - arrival price) / arrival price x 10,000 bps

Index Cost (bps) = (avg execution price - arrival INDEX price) / arrival index price *10,000 bps