Trading strategies

Brave ones,

Probably we don’t have straightforward answers to this theme but I would like to get your comments, if possible:

  1. large % of AVD // wide spread // urgent = BROKER

  2. large % of AVD // narrow spread // urgent = CROSSING

  3. small % of AVD // narrow spread // urgent = IMPLEMENTATION SHORTFALL

  4. small % of AVD // narrow spread // not urgent = BROKER/CROSSING

Extra ball) I do not understand the relation of a WIDE SPREAD and the choice to use CROSSING or BROKER. Can we use both?

many thanks once again,

If liquidity is poor ( indicated by wide spread) AND your order is large compared to average daily volume, use broker who can locate liquidity through their contacts . X ing network won’t do leg work for you. also your trade may never get done on a Xing network if liquidity is poor

if liquidity is good ( narrow spread ) , do use a X ing network because you will get the trade sone at lower cost than a broker particularly for large %ADV . Why give up costs to a broker who doesn’t have to look far for liquidity.

Cost versus getting the job done

what about small ADV, wide spread with high urgency?

IMPLEMENTATION SHORTFALL, to minimize implicit costs with early trade?

Implementation shortfall strategy reduces delay costs which are a portion of implicit costs.

Implimentation costs = Explicit costs (smaller portion) + Implicit costs (larger portion)

reducing the implicit costs has a greater affect on total implementation costs than increasing explicit costs

Daily trade volume pattern is another factor?

Why not to use Implementation Shortfall for case 4)?

4) small % of AVD // narrow spread // not urgent = BROKER/CROSSING

I believe you won’t need to fragment a trade with small % of AVD, risking some implicit costs (delay of full execution).

However, # 4 is identified in this way on CFAI

4) small % of AVD // narrow spread // not urgent = VWAP

Yeah, I’d use VWAP algorithm for 4. The lack of urgency means that you afford to wait to squeeze costs.

2008 AM session Ques 8-B

ans : CHA security chosen for VWAP

its has small % wrt ADV, low spread low urgency…but the characteristic which did not convince to choose it as a best for VWAP algorithm is trades HIGH AT THE END OF THE DAY.

Any views why was still chosen?

my 2 cents,

VWAP is suitable to follow the predictable trading pattern of the security, so it’s a mirror strategy in the sense you just fragment your trade according to the expected volume profile, attempting to equal/outperform the VWAP ‘bench’

what about this?

5) small % of AVD // wide spread // not urgent = ??? BROKER / CROSSING ???

  1. Small % of AVD - Not urgent - wide spread

Crossing network will be prefered over broker. Basically both are useful when you have a block order to but given a choice Broker will be more costly

does small % of AVD necessarily means block order?

or we can have a block order without having a large % of AVD?

or block order implies order fragmentation and then we would go directly to algorithmic trading strats?

now I am puzzled…thanks once again

block order = an order to buy/sell in a quantity which is large relative to liquidity ordinarily available

so a block order is necessarily linked with large % of AVD? can I infer this?

or can we have a ‘relative large to liquidity ordinarily available order’ and still be a small % of AVD?


large % of average daily volume ~ relative large to liquidity ordinarily available, I guess

It’s difficult to say whether you would incur more costs with a broker (explicit costs -yes, but total costs - ?) Using a broker may allow them to find some liquidity in the market and lower the spread a little, hopefully covering their cost of finding it.

I agree rahuls but you mentioned a block order with small % of AVD.

this trading strategies theme is so ambigous for me

FinNinja, but it is a small order & not necessarily suitable for upstairs markets. I belive Brokers are mostly used for BLOCK txns.

It would be better to put this order in POSIT (crossing network) where all small order will be batched toghether & crossed at a specific time. Risk is that it may not be executed coz crossing doe not guratantee that trade will have an opposite match or may only be partially filled. But it a NOT URGENT one. Absense of dealer here will lower the commission.

Is in it?

The choice of not using a broker could increase your delay costs though, this being a less liquid security. As you mentioned the risk of the crossing network is that there may not be an opposite match available.

I don’t know what the right answer is on this one, but I think you have a more guaranteed execution for a (possible) higher price with a broker. I would worry about not being able to execute the trade at all, or having it severly delayed - increasing those costs.

Tigas - are there actual answers to these questions?