Active investment management is in a fight for competitive survival. Excellent idea generation will succeed only if the process is implemented effectively. The markets are where “the rubber meets the road,” and effective trading forms the foundation for securing the benefits of excellent research and strategy. TOPICS:Exchanges/markets/clearinghouses, portfolio management/multi-asset allocation
The author reviews the original article, “Five Myths about Listed Trading,” published in 2002, and provides three thoughts for consideration to today’s readers.
This paper provides a perspective on volatility forecasting. The basic idea is that a number of factors are leading to volatility having a lower baseline expected value than in prior years. These factors include lower earnings uncertainty, greater market efficiency, better market-marking, and the fact that volatility trading itself tends to reduce volatility. TOPICS:Volatility measures, exchanges/markets/clearinghouses
Richard Roll observed that continuous markets are more volatile than other market structures. If it is true that continuous markets induce volatility, then unless we change that market structure, we will continue to be plagued with sporadic bursts of nonfunctional, uninformative volatility. This article looks to the underlying reasons and suggests a more serviceable market structure.
Day traders are likely to use leverage to increase their profits. This article systematically analyzes the effect of leverage on profit when using a popular day-trading strategy and clarifies the relation to two optimal leverage strategies proposed for maximizing trading profit: the Kelly criterion and the optimal fraction criterion. The author’s empirical analysis shows how leverage can increase the profit in day trading. TOPICS:Statistical methods, performance measurement
Exchange-traded funds (ETFs) are well suited for trading in student-managed investment funds (SMIFs). Unlike other forms of security selection, ETF trading provides efficient trading of portfolios by asset classes, subclasses, investment style, countries, regions, and sectors. The learning experience from trading ETFs based on global macroeconomic themes enhances the learning experience of economics students by requiring application of macroeconomics, industrial organization, international economics, and econometrics. This article presents the structure, tools, and results of an ETF trading program implemented by the economics and finance departments at the University of Richmond. Although this SMIF example uses ETF funds as a learning medium for undergraduates, the investment process with ETFs is also well suited to small individual investors. TOPICS:Exchange-traded funds and applications, portfolio construction
This commentary is on a paper published in 2010. Few would wish to roll the markets back to where they were eight years ago, but have the issues that were debated then been adequately resolved? Are today’s markets acceptably efficient? Can we relax about market quality? My answer to each of these is “no.” What I wrote in 2010, I stand by now. Along with revisiting my previous discussion on dark pools, fragmentation, price discovery, and liquidity, this commentary presents my newer thoughts concerning the definition of the term “liquidity,” and the existence of an illiquidity premium.
This article examines every NASDAQ ITCH feed message for S&P 500 Index stocks for 2012 and identifies clusters of extremely high and extremely low limit-order cancellation activity. The authors find results consistent with the idea that cancel clusters are the result of high-frequency traders jockeying for queue position and reacting to information to establish a new price level. Furthermore, few trades seem to be executed during cancel clusters or even immediately after them. Low cancellation activity seems to be markedly different, with many level changes all caused by executions. The results are consistent with high-frequency trading firms behaving as agents who bring efficiency to the market without the need to have executions at intermediate prices. The authors also discuss the misconception that investors and low-frequency traders are synonymous and its implications for policy given these results.
The CFA Institute defines Best Execution for securities trading as a process, not an outcome. For many, this is a disquieting definition, for it does not lead to easy yes/no answers. Instead, it leads to an active modeling and analysis of what goes into trading. We apply the work of Peter Drucker to the execution process, with an emphasis on: 1] establishing goals (typically to increase returns by lowering costs), 2] defining the process (including the roles of the portfolio manager, broker, and commission directing clients), 3] analyzing the data (measuring costs, but with context) to identify problems, 4] proposing solutions. This is not a simple exercise, for the process is both complex and filled with nuance. But it takes the random element out of the measurement of best execution. More importantly, it also leads to improved results over time. TOPICS:Portfolio theory, exchanges/markets/clearinghouses, performance measurement
Active investment management is in a fight for competitive survival. Excellent idea generation will succeed only if process is implemented effectively. The markets are where the rubber meets road, and effective trading forms foundation for securing benefits of excellent research and strategy.
Since the introduction of Trader Alpha Frontier, this framework has been adopted by asset managers of all sizes, to monitor their trading performance. The next logical step is for Chief Investment Officers to incorporate Trader Alpha Frontier into their main view of portfolio returns. The author visualizes how CIOs can get a full insight in all alpha sources throughout the investment value chain including Analysts, Portfolio Managers, Traders, and Brokers. TOPICS:Performance measurement, risk management
In this paper we revisit techniques from Creating Dynamic Pre-Trade Models: Beyond the Black Box (Kissell, 2011) which was awarded the Journal of Trading's Best Paper of the Year Award in 2011. We provide investors a pre-trade of pre-trade modeling technique that can be used to decipher broker and vendor models, and can be used to calibrate a customized investor specific market impact model. We also provide a suite of Excel TCA Add-In functions that can incorporate investor specific market impact parameters and allow investors to perform TCA analysis on their own desktops within Excel, and with the added level of security and comfort that their investment decision process will not be reverse engineered because they do not need to upload or transmit any of their proprietary information and valuable trade information to a third-party website or API for analysis. Techniques in this paper enable investors to create their own customized TCA analyses within Excel to assist with both trading decisions and portfolio analysis and optimization.
Trading "these" securities for "those" (portfolio trades) can be expensive if done through our current continuous markets. This article compares a broker-implemented blind bid solution to this problem in a continuous market setting versus a combined value computerized call market that maximizes available liquidity to create balanced trades between such lists. The technology is known: combined value markets are in use today servicing markets in logistics contracts, emissions permits, spectrum licenses, and aerospace procurement. Should not financial concerns, such as custodial banks, be currently offering such services to their clients? TOPICS:Exchanges/markets/clearinghouses, portfolio management/multi-asset allocation
In this paper we take a retrospective look at our paper “Phantom Liquidity and High-Frequency Quoting” and discuss the context of the research in light of our broader inquiry into the nature of the high-frequency trading industry. The data presented in this paper appear to show that limit order cancellations of high-frequency traders are associated with price discovery and liquidity provision, rather than some manner of systematic taking advantage of other market participants. These firms are acting as rational, profit-seeking businesses, and we believe time has shown this view to be correct. In the years since publication, HFT has matured, and consolidated into fewer, lower-cost providers of efficiency and liquidity services, much like we would expect in any other industry. TOPICS:Legal/regulatory/public policy, quantitative methods
The authors examine their 2014 publication “Predicting Intraday Trading Volume and Volume Percentages” and discuss subsequent changes in trading that validated the models outlined in the paper and prompted updates. The original models accommodate the general shift to passive investing and the trend toward ETF investing. Analyzing imbalance information has become more important to institutional traders as relative participation in closing auctions has increased. The authors discuss the evolution of analytical software platforms since the paper and outline expected trends in both volume forecasting and trading analytics. A major application of enhanced volume forecasts relates to the trend of buy-side clients performing scientific experiments to select algorithms and inform parameter selection. Specifically, volume profile error, a metric examined in the paper, provides context to compare broker algorithm performance and real-time volume forecasts can be used in algorithm routing decisions. TOPICS:Exchange-traded funds and applications, quantitative methods, statistical methods
ECNs and other electronic venues familiar to Nasdaq traders are beginning to gain traction on the listed side. These innovations are causing investors to reevaluate the meaning of “best execution” and other traditional views about the listed marketplace. The author reviews five such views and concludes that they are myths, not truths. To properly evaluate best execution, careful investors will similarly test doctrinaire notions of listed trading. TOPICS:Exchanges/markets/clearinghouses, performance measurement
This article examines the impact of MiFID II on European equity market liquidity. MiFID II eliminated broker crossing networks, introduced caps on dark trading, and brought about new types of venues. The authors investigate the changes in the market in the lead-up to the January 3, 2018, implementation date and the early evidence supporting the expected liquidity shift toward block networks, periodic auctions, and systematic internalizers. Although all signs indicate limited change for end-investors, the delay in implementation of the double-volume caps means it is too early to fully assess the impact on trading costs. TOPICS:Exchanges/markets/clearinghouses, developed
