Suppose you are a
trader for a mutual fund. You need to unload 100,000 shares of a thinly traded
stock—fast. How do you do it? If you are two aggressive, you will move the
market against you. If you are too passive, it may take days to fill the order.
This is the traders' dilemma.
Trading for
institutional investors is not about making profits. It is about rapid execution
with minimal transaction costs. Brokerage fees, bid-ask spreads, impact costs and
a myriad other transaction costs can easily consume 2% of a transaction's value.
Many institutional investors turn their portfolios over two or three times a
year. Poor execution can shave percentage points from annual returns.
This outstanding
book is about transaction costs—the forms they take, how to anticipate them, how
to measure them, and how to mitigate them. The goal is good execution—how to
plan for it, how to implement it, and how to assess in retrospect whether you
achieved it.
Contents
1. Transaction Costs
2. Unbundled Transaction Cost
Components
3. Pre-Trade Analysis
4. Price Appreciation
5. Market Impact
6. Timing Risk
7. Opportunity Cost
8. The Holy Grail of Market Impact
9. Optimal Trading Strategies
10. Principal Bid Transactions
11. VWAP Trading Strategies
12. Advanced Trading Techniques
13. Post-Trade Analysis
While the book
addresses a practical topic, it does so from a largely theoretical perspective.
Its focus is not on the practicalities of trading, intermediaries or vehicles
for placing orders. For coverage of such hands-on topics, see Harris (2003)
or Schwartz and Francioni (2004).
Rather, the book delves deeply into the mathematical modeling of transaction
costs. This can be used to implement trade support analytics or it can simply be
understood by a trader—shaping her understanding of the tradeoffs she faces each
time she places a large transaction.
This is the
definitive book on transaction costs. It is required reading for anyone who
trades for institutional investors. I also recommend it to any trader—all face
transaction costs, so all will benefit from the insights this book offers. I
also recommend the book for market risk managers at trading organizations, financial engineers and
developers of trading analytics.
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