All asset managers should have a trade policy document that clearly and comprehensively articulates the firm's trading policies and escalation procedures. The curriculum can be quite wordy in this section. The heart of the message is simply this: “Firms need…

Trade execution, a quantitative process assesses the performance of traders, algorithms, and brokers. Trade cost assessment, known as Trade Cost Analysis (TCA) or post-trade analysis, aids portfolio managers in selecting optimal trading methods and identifying and rectifying process issues. This…

Trade Cost Measurement In its simplest terms, trade cost would just represent the commission paid to place a trade. However, this view is simplistic in that it only represents a portion of the total costs. The vocabulary from Reading 11,…

The following sections compare and contrast trading within the following markets: Equities. Fixed income. Exchange-traded derivatives (options and futures). Off-exchange (OTC) derivatives. Spot currencies. Equities Equities offer the most robust and viable platform for electronic trading. Equities are the most…

Algorithmic trading is the practice of using programmed strategies to electronically trade orders. This practice is common in most equity, foreign exchange, and exchange-traded derivative markets. As with fixed income, algorithmic execution is mostly limited to trading highly liquid government…

The goal of any trade is to find a balance between the cost of execution and other risks with the benefits expected from executing the trade. Various trades have differing desired outcomes (i.e., making a quick profit vs. rebalancing a…

Reference prices, also called price benchmarks, are specified prices, price-based calculations, or price targets used to select and execute a trade strategy. Traders use reference prices to determine the effectiveness of their trades, both past and proposed. According to the…

Trade strategy inputs refer to the characteristics that inform the particular trade strategy chosen. The goal is to maximize the benefit of the trade, taking into consideration costs and risks. The following are the main inputs used in trade strategy…

Portfolios must be created and maintained to reflect the risk/return characteristics of the ultimate beneficiaries. This section discusses the different reasons why managers need to trade. While active managers have more motivation to trade, even passive managers will need to…

Institutional investors often employ an active risk budget, typically gauging how much their portfolio deviates from the investment policy targets annually, often as a tracking error limit. This limit might be increased to seek higher returns or decreased to reduce…