Reading 41: Execution of Portfolio Decisions－LOS m class, including, specific, average, determine

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 14: Execution of Portfolio Decisions
Reading 41: Execution of Portfolio Decisions
LOS m: Discuss and justify the factors that typically determine the selection of a specific algorithmic trading strategy, including order size, average daily trading volume, bid-ask spread, and the urgency of the order.

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A trades volume is a small percentage of average daily trading volume. The trade has low spreads and is not urgent. Which of the following would be the best method of filling the trade?

A) Placing the trade with a broker.

B) Placing the trade in a crossing system.

C) The use of a simple logical participation strategy based on VWAP.

D) The use of an implementation shortfall strategy.

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Answer and Explanation

Trades that are a small portion of average daily trading volume, with low spreads, and low urgency should be traded with a simple participation strategy. Simple logical participation strategies patiently trade throughout the day.

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A trades volume is a large percentage of average daily trading volume and has high spreads. Which of the following would be the best method of filling the trade?

A) A simple logical participation strategy based on VWAP.

B) A simple logical participation strategy based on TWAP.

C) Placing the trade with a broker.

D) A simple logical participation percent-of-volume strategy.

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Answer and Explanation

If a trade is of relatively large size and has a large spread, it should be traded through a skilled broker or through a crossing system to minimize the spread.

tycoon

A trades volume is a small percentage of average daily trading volume. The trade has low spreads and is urgent. Which of the following would be the best method of filling the trade?

A) The use of a simple logical participation strategy based on VWAP.

B) Placing the trade with a broker.

C) The use of an implementation shortfall strategy.

D) Placing the trade in a crossing system.

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Answer and Explanation

Trades that are a small portion of average daily trading volume, with low spreads, and high urgency should be traded with an implementation shortfall strategy. These strategies trade early in the day and would accommodate an urgent trade.