Below is CFAI EOC
A trader has been given two trades to execute with the following characteristics. What tactics do you recommend? Trade Size (Shares) Average Daily Volume (ADV) Price Spread (%) Urgency A 200,000 6,000,000 10.00 0.03 High B 150,000 200,000 10.00 0.60 High Second one is to use a Broker which I understand. What should be the First one?
I picked market order but the answer was implementation shortfall.
Why is market order not good? its urgent and small percentage of volume so it will get filled
is it like one is order type vs one is strategy?
A] would be Implementation Shortfall: 1. urgency is high 2. volume is not large relative to avg volume (3.3%), 3. bid/ask spread is narry 0.03%.
B] would be broker or electronic crossing network because volume is almost all of the avg volume and bid/ask spread is wide.
Market/limit orders is not what they are asking here. This LOS is about IS/VWAP/ECN/Broker mkt.
The question asks for a trading tactic to recommend.
Based on the example in the book, the 3 major tactics are: VWAP, Implementation Shortfall, and Broker/Crossing Network.
Market order woudn’t be considered a tactic, but rather a type of order.
Finally, when they talk about strategies, in this context, they usually refer to Algorithmic Trading Strategies (VWAP, Implementation Shortfall, TWAP. % of Volume, Implementation Shortfall, etc.).
To be honest, the distinction between a tactic and a strategy is vary vague in the book.
Correct me if I’m missing something.
thank you both… Its clear now.