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Study Session 16: Trading, Monitoring, and Rebalancing

2018 AM Q10 Part B

The question provides some commentary on trades a person is planning to execute, and asks if they should select VWAP, Implementation Shortfall, or Opportunistic. 

For the HRET stock, it exhibits both low trade urgency and represents a large % of faily volume. The answer by CFAI is Opportunistic.

Are VWAP and IS not appropriate mainly because they both are used when order size is small % of market volume?

Question on VWAP

in the book, it says that VWAP ”Works best for comparing smaller trades in nontrending markets”

However, in the 2008 paper, question 8B, security CHA is chosen despite the fact that intraday trading volume pattern is higher at the end of the day- wouldn’t that indicate a trending market and thus deem VWAP unsuitable? 

Traders Types Vs Trading Tactics

Trying to fit trader types under trading tactics, I would love your opinion on that;

1. Information motivated trader would use Liquidity at any cost since there is a piece of information that the investor want ot utilize as soon as possible to benefit from before fore runners.

2. Value Motivated Traders –> Need trust worthy agent to select good opportunities

                                            –>or Liquidity at any cost to execute as soon as we find a good opportunity

3. Liquidity Motivated Trader –> Cost are not important

liquidity at any cost, information motivated trader or liquidity motivated trader

I’m a bit confused how it is liquidity at any cost and not information motivated trader or liquidity motivated trader.

Craig asks Ramsey to comment on trading tactics at his previous firm. Ramsey replies that trading tactics were directly related to trade motivation, which enabled him to trade significant positions in stocks the firm had considerable information about. Accordingly, these trades were often expensive in terms of commissions and price concessions in order to achieve timely execution.

Trading and Performance evaluation

Under which section doe Trading and Monitoring fall under , from component weights perspective ? It has an entire book to it but one question from the AM section, is it worth it ?

market impact

Not really getting the concept.

Once I understand market impact is the difference i the execution price and the previous day’s closing price - when we calculate components of the implementation shortfall.

When calculating transaction cost components it is explained to be the difference in the execution price of two consecutive trades.

Confused. 

The Iceberg of Transaction Costs

On Volume 6, page 29, Exhibit 7. The Iceberg of Transaction Costs. Why large cap has low trading cost than micro-cap?