Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Non-Tech : Ashton Technology (ASTN) -- Ignore unavailable to you. Want to Upgrade?

To: Nanchate who wrote (3372)	2/18/2000 6:48:00 PM
From: Nanchate	Respond to of 4443

Principle -VS- Agency Trading; The Cost of Immediacy sirif.org.uk The Cost of Immediacy Principal versus Agency Trading Recent analysis that we have done at Credit Suisse/First Boston indicates that the prevailing practice in the UK markets of demanding immediate fills for trades may not result in trade executions being done at the best available prices. We have found that with the advent of the order book system of SETS, there may be a viable trading alternative to the common practice of placing market orders that will provide better execution prices and thus lead to better portfolio performance. Our analysis of execution prices for large trades ? those greater than three times NMS ? showed that a disproportionately large number of fills for large trades occurred in the tails of the daily high ? low price range. Further investigation led to the realisation that many fills for large buy trades were close to the high price of the day, while the fills for many large sell trades were done close to the low price of the day. Clearly a trading strategy that was able to obtain prices that were closer to the middle of the high ? low range should be able to provide better fills on average. The alternative that we think provides fills of this type is one based on obtaining the volume weighted average price (VWAP) of the day. Using a VWAP strategy would mean switching from a trading style that used capital by placing market orders and demanding immediate fills to one that provided capital through limit orders and patient trading. The data that we used in our study was about nine months of daily trading data for the companies that were part of the FTSE 100 for the period from June 15, 1998 to the end of February 1999. We examined all the trades that were classified as ordinary trades or order book trades by Reuters. For trades that were greater than three times NMS we devised a sterling gain or loss measure based on the direction of the trade, the price of the actual fill, and a VWAP. Trade directions were determined by the where the fill was in relation to the mid of the bid ? ask range. Trades below the mid were considered sell trades and prices above the mid were considered buys. The VWAP that we used for comparison purposes was based on the number of days we thought it would take to complete a trade. Thus, for example a trade that was 50 times NMS would have a VWAP based on five days of actual trading. A loss for a trade occurred if a buy trade was filled above VWAP or if a sell trade was filled below VWAP. A gain was obtained if sells were filled above VWAP or buys were filled below VWAP. The gains and losses for each large trade were weighted by the number of shares traded and then aggregated to calculate a daily gain or loss associated with the large trades. Daily gains and losses were then summed to arrive at an overall gain or loss for each of the companies in our universe. Each company's sterling gain/loss was converted to a basis point equivalent by dividing the gain/loss by the total value of each company's large trades. Of the 118 companies that we examined, 106 showed a loss associated with the actual fills for large trades. On average the size of the loss was 18 basis points, with many of the losses falling in the 15 to 25 basis point range. The second section of our analysis used a formal statistical test to see if there was a significant difference between the average proportion of trades that fell within three equally sized segments of the high ? low price range for large trades and for hypothetical VWAP trades. What we wanted to investigate here was whether a significantly larger proportion of large buy trade fills occurred in the upper end of the price range and a significantly larger proportion of the large sell trade fills occurred in the lower end of the range, in both cases what we would consider the wrong end of the range from a trader's perspective. We believe that the results strongly indicate that a disproportionately large number of fills are being done at the wrong end of the range. Approximately 63% of the companies, based on a 10% confidence level, in our universe had a significantly larger proportion of large sell trades filled at the lower end of range. There was a slightly larger number of companies that had a significantly larger proportion of large buy trades filled in the upper end of the range. Approximately 77% of the companies covered showed significantly lower proportions of the fills for large trades occurring in the middle of the range, that part of the range where the VWAP most often fell. We think that both parts of our analysis show that for large trades better fills can be obtained if a patient trading strategy is followed. To obtain these better prices there will have to be a switch from the traditional way of executing large orders in the UK, away from demanding capital and immediacy to one of providing capital and trading patiently. A strategy of this type clearly means that rushing into the market to exploit information may not always result in the best prices for a trade. In fact a strategy of this type may impart information to the market unnecessarily, whereas patient trading can be as effective in getting orders filled while reducing the possibility of internal information being leaked into the market. Having said this we do think there are occasions where immediacy will provide relatively beneficial results. What those occasions are will have to await further research. But if there are occasions where demanding capital is the appropriate trading strategy, then the results we show here are more powerful since the poor executions associated with demanding capital at inappropriate times will occur more frequently.

To: Nanchate who wrote (3372)	2/20/2000 7:06:00 AM
From: Keith A Walker	Read Replies (1) \| Respond to of 4443

This was the best part: New instruments such as the VWAP trading facility proposed by the Philadelphia Stock Exchange, and the emerging electronic trading facilities such as Instinet, ITG Posit, the Arizona Stock Exchange, Lattice and Optimark, make feasible the implementation of trading strategies that will enable institutions to realize the value of the option to trade. Thus, institutions have an opportunity to dramatically improve returns on assets for which they serve as fiduciaries.