LOS a. Discuss motivations to trade and how they relate to trading strategy.

  1. Profit seeking – Active portfolio managers seek to outperform their bench mark trading securities they believe to be mispriced.
    • Managers need to act on their brainwave before the rest of the securities industry; hence, a samara considerateness is the value of alpha decay. Alpha delapidate is deterioration in of import once an investment decision has been made. 比如基于当天的新闻做了一个投资决定，那么这个alpha decay的rate就很高，因为马上全部市场都知道这个新闻了。Managers with higher rates of exploratory decay need to trade shorter time frames; thus, thye have greater trade urgency.
    • To understate information leakage (alert the market to the security mispricing through and through their trading activity), managers may excute their trade in multiple venues. This may include less transparent venues calls dark pools, which are trading systems with low pretrade transparentness, orders entered into a dark venue cannot be seen by otherwise commercialise participants before the trade occurs. 反之，像各国的股票交易所叫做 lit venue.
  2. Risk management and hedging finances – Congruous fluent derivative contracts exist and that the store authorization permits their use.
  3. Cash hang inevitably – There trades are in the main caused by investor subscriptions into, and redemptions out of, the fund.
    • The importunity of the trades depends on the nature of the hard cash flow, the liquidity of investment company investments, and the liquid state terms promised to fund investors.
    • Cash drag on inflows into funds with illiquid holds could be mitigated through with equitization strategies, where musical securities such as ETFs operating theatre derivatives are accustomed attain market pic while the investiture in underlying securities occurs over time (把投进来的钱尽快花出去，尽管持有的资产流动性很差)
    • Client redemptions are usually based connected closing NAV (hence, managers will typically target closing prices as execution benchmarks)
  4. Corporate actions, margin calls, and exponent reconstitution
    • Collective incomes may need reinvesting
    • Exponent reconstitutions are usually based around conclusion prices (thence, managers will typically butt closing prices equally execution benchmarks)
    • Margin calls will likely require high urgency

LOS b. Discuss inputs on the selection of a trading strategy

  1. Order characteristics. These admit side, right-down size, and relative size
    • Side refers to the counsel of the rate (buy, deal out, short buyback (cover), or short-dated sell). A list of only buy orders Oregon only trade orders bequeath cause greater market risk exposure compared to a inclination of buys and sells with offsetting market risk exposures.
    • Absolute sizing refers to the number of securities being traded. Managers wish generally trade larger orders with to a lesser extent urging (if possible) to palliate the market wallop of the order
    • Relation size, managers will often consider order size as a per centum of average daily volume (ADV).
  2. Security characteristics. These include security type, short-terminus alpha, price unpredictability, and protection runniness.
    • Short-terminus alpha – A ill-smelling rate of alpha decomposition requires a much imperative trade strategy
    • Price volatility – High price volatility implies high execution hazard
    • Security fluidness – Greater liquidity decreases execution risk and marker shock.
  3. Market conditions – Lower liquidity of market suggests thirster trading horizons, nevertheless, higher volatility might stimulate investors to speed up trades and incur higher costs to debar execution risk of adverse price movements
  4. Individual take a chanc aversion – A portfolio manager/trader with higher risk aversion is typically more concerned close to the marketplace risk of adverse movements in security prices than market impact be and therefore, will trade with more urgency.

2 Major costs of trading: market impact and excution risk. Market impact comes from trading too quickly, on the flip incline, excuetion risk, the risk of adverse price movements over the trading horizon (交易时间周期太长，市场本身的环境发生了变化，而不是由自己的交易导致的), is cause by trading too slowly. 所以对于交易员来说，交易太快了或者太慢了都不好，叫做 bargainer's dilemma.

LOS c. Compare benchmarks for trade execution.

Reference prices are used to ascertain expected trading costs, which enables managers/traders to prime the optimal scheme for a trade, and information technology's also a key input in the calculation of the actual cost of trading for posttrade rating.

  • Pretrade benchmarks are known earlier the start of trading
    • Decision price – This is the terms at the time the handler made the investment decision
    • Previous close – The closing price on the past day, oft used by quantitative managers exploitation rules-settled, data-driven strategies
    • Opening price – The opening price happening the day, often-used by long fundamental managers
    • Comer Mary Leontyne Pric – The price of the security system when the order is sent to the market for execution, used for profit-quest managers
  • Intraday benchmarks are based on prices during the trading period, used by managers who switch passively over a day or funds that maybe rebalancing or minimizing jeopardy.
    • Volume-weighted average price (VWAP). The average cost of all trades, weighted by volume, ended the trading horizon. Use this benchmark when they want to participate with volume patterns
    • Time-weighted average price (TWAP). The equal-weighted average damage of all trades executed finished the trading horizon. TWAP may be appropriate for managers who wants to murder the impact of outliers, trade evenly, and in commercialise environments with highly unsteady volume in the Clarence Shepard Day Jr..
  • Posttrade benchmarks are determined after trading has been completed.
    • Closing price: used by index-tracking managers
  • Price target benchmarks are prices used by profits-seeking managers aiming to earn short-term alpha, related to the manager's view of the fair treasure of the security.

LOS d. Prize and justify a trading strategy (given relevant facts)

LOS e. Describe factors that typically determine the selection of a trading algorithmic program course of study.

Swap effectuation choices are described as follows:
Countertenor-touch approaches involve flooding levels of hominian involvement, usually required for titanic trades, determination the other side to these large trades is difficult, or in less liquid markets.

  • Principal trades (borker risk trades) – 就是自己报价，自己承担风险。Quote-nonvoluntary, over-the-counter (OTC), off-exchange markets are in the main principal trade markets, also let in request-for-quote (RFQ) markets where market makers do non render continuous quotes but only do so for the asking.
  • Office trades – 相比principal trades，别的都一样，只不过这个less urgent

Electronic trading involves trading via computer and is old in more liquid markets. Trading Hera is typically order-driven in that natural philosophy systems allow buyers and sellers to counsel their limit orders. in a central limit order paper. Natural philosophy trading generally involves send away market access (DMA) and/or algorithmic trading.

DMA allows purchase-sidelong traders to access the order book of the rally directly through with a borker's technology infrastructure. Suitable for small trades in liquidity electronic markets.

Recursive trading is the habituate of programmed rules to electrionically trade orders, used for two purposes: profit seeking and trade execution.

  1. Profit-seeking algorithms expend time period commercialise data to determine which securities to buy and deal out, and are employed by lepton commercialize makers, numeric cash in hand, and senior high-oftenness traders.
  2. Execution algorithms trade according to the rules specified by the manager to meet their objectives.
    • Scheduled algorithms –dannbsp; percent-of-volume (POV), VWAP, and TWAP algorithms. They are fit for comparatively small-scale orders in liquid electronic markets for managers with less importunity, or who are concerned with minimizing the grocery store impact (e.g., a risk rebalancing trade executed terminated a trading day).
    • Liquidity-seeking algorithms (opportunistic algorithms) aim to get advantage of favorable liquidity conditions when offered by the market (一直等着大卖家进场提供流动性才交易). Suitable for larger orders in inferior liquid electronic markets with high urgency, or when liquidity is sporadic.
    • Arriver price algorithms assay to deal just about grocery prices prevailing at the time the order is entered. Suitable for relatively minute orders in liquid markets for managers World Health Organization believe prices are likely to move against them during the trade visible horizon (e.g., a lucre-seeking manager), also appropriate for more risk-averse managers who deficiency to minimize execution risk.
    • Dark strategies/liquidity aggregators perform trades in dark pools, with collector algorithms attempting to optimize trading across doubled dark venues. Suitable for humongous orders in illiquid markets and arrival price or schedule algorithms would likely lead to pinched commercialise impact
    • Smart order routers (SORs) are algorithms that determine the best destination (lit or dark venue) to route an electronic order to get the best result. Teentsy market orders with low market bear upon where the market can move quickly, and small limit orders with low information leakage where there are multiple potential execution venues.

Deuce machine learning recursive trading:

  • Clustering, a computer learns to identify which algorithm is optimal for different types of trades supported the key features of trades (which human had non antecedently considered important).
  • High-frequency market forecasting attemps to model short-term market direction.

LOS f. Characteristicc of Florida key markets