Trading, Manager Selection And Appraisal Flashcards
Capture ratio greater than 1
Positive assymetry
Convex return profile
Factor model based benchmark
Involve relating a specified set of factor exposures to the returns on an account
Returns based attribution
Returns-based attribution uses portfolio returns to identify the factors that have generated those returns.
Holdings based attribution
Uses beginning of period portfolio holdings to evaluate the decisions that contributed to the returns.
Transaction based attribution
Improves upon the holdings based attribution by including the impact of any trades executed during the evaluation period
Micro attribution
Analyses the portfolio at the portfolio manager’s level. Seeks to verify that the portfolio manager did what they said they would and to understand the drivers of portfolio return
Macro attribution
Analyses investment decisions at the fund sponsor’s level. Commonly used with institutional investing. Has an investment committee which does the SAA and an investment staff which does the TAA and manager selection
POV algorithm
POV Algorithm (Stock Market)
Definition: A Percentage of Volume (POV) algorithm executes trades as a set percentage of the market’s total trading volume.
Purpose: Minimize market impact by aligning trades with natural market activity.
Use Case: Ideal for institutional traders handling large orders.
Example: With a 5% POV, if the market trades 1M shares, the algorithm executes 50,000 shares.
Advantages:
Reduces price slippage
Adjusts dynamically to market conditions
liquidity seeking algorithms
aim to take advantage of favourable liquidity condiitons when offered by the market
arrival price algortihm
seek to trade close to market prices prevailing at the time the order was entered
Smart order routers
Algorithms that determine the best destination to route an electronic order to get the best result.
focus on getting the best price or highest probability of execution for limit orders.
- for small orders
schedule algo when to use
for relatively large orders in liquid markets for managers with less urgency who are concerned with minimizing market impact
when to use liquidity seeking algos
for larger orders in less liquid markets with higher urgency while trying to mitigate market impact
when to use arrival price algos
relatively small orders in liquid markets for managers who believe prices are likely to move against them during the trade horizon, and therefore wish to trade more aggressively. Short term alpha
when dark strategies
- large orders
- illiquid markets
- when arrival price and scheduled algos will lead to higher impact costs
- managers that do not need to execute the order immediately
when SOR algos
Small or orders for best route in prevailing marketing conditions
Clustering
Machine learning technique whereby a computer learns to identify which algorithm is optimal for different types of trades based on the key features of the trades
- grouping similar types of trade
high frequency market forecasting
attempts to model short term market direction
pretrade benchmarks
- decision price
- previous close
- opening price
- arrival price
Intraday benchmark and when used?
- twap
- vwap
Managers without views on short-term price movements who wish to
participate in volumes over the execution horizon
Front running
Front running is when someone, like a broker, secretly buys a stock before a big client order they know will increase the stock’s price. They then sell their shares at a higher price after the client’s trade pushes the price up, making an unfair profit.
Flickering quotes
Flickering quotes are exposed limit orders that electronic traders submit and then cancel shortly thereafter, often within a second. Electronic dealers and algorithmic buy-side traders submit and repeatedly cancel and resubmit their orders when they do not want their orders to stand in the market; rather, they want other traders to see that they are willing to trade at the displayed price.
Bluffing
- Involves actual trades (not just fake orders) to manipulate market perception.
- Often part of pump-and-dump schemes, where traders buy assets to push prices up, lure in momentum traders, and then sell at a profit.
- Can include rumors, misleading information, or wash trading to amplify the deception.
- Example: A trader buys stock, spreads positive rumors, gets others to buy in, and then sells at the inflated price.
Spoofing/layering
- Involves placing fake orders to create an illusion of market demand or supply.
- The goal is to mislead other traders into buying or selling based on false signals.
- The spoofer cancels their fake orders after benefiting from the manipulated price movement.
- Example: A trader places large sell orders to trick others into thinking prices will drop, then cancels them and buys the stock cheaply.
