Trading tactics

CFA Level III Portfolio Management
#1

Hi,

I have questions about EOC question #17 in reading 29.

There are two trades

Trade Size Average daily volume Price Spread (%) Urgency

A 200,000 6,000,000 10.00 0.03 High

B 150,000 200,000 10.00 0.60 High

They suggest we use an implementation shortfall algorithm for trade A and a broker for trade B.

M y questions:

General: What do we call “yield” in this context?

Trade A: Why IS algorithm for trade A? I understand we do not need a simple logical participation strategy because we do not need to disguise our intent as the size to be sold is thin compared to market volume. But isn’t an IS algorithm a bit complicated for a trade that seems to be quite simple? Shouldn’t we simple answer “market order” to that question?

Trade B: Why not a simple logical participation strategy for trade B? The stock is thinly traded compared to the desired transaction. So we should disguise our intent. Is it not the prefered choice because it may take too much time and urgency is “high”?

thanks!

#2

I can’t answer your General question

REgarding the other points, not sure it is the explanation you are looking seems you seem to want to understand the reasonning, but, from my point of view, what one needs to remember for the exam is :

Low volume , low spread , low urgency => VWAP

Low volume,low spread, high urgency => Implementation Shortfall

High volume => Broker or crossing system

See Exhibit 12 of R29.

Note that this is exactly the kind of resons you will find in the correction of AM exam.

See for example Question 10, part C of the 2014 AM exam

Kinds regards

#3

Ok, thanks! Seems like a fair rule! I will test it on mocks and see if it works consistently.

Cheers