Community

How has the overnight risk changed across Market Caps? - Jan 17th 2017

How has the overnight risk changed across Market Caps?

 

Chart 1: Overnight risk trends for Peer Active stock universe

 

Chart 2:  Implementation Shortfall cost attributed to trades completed on day two of two-day orders

  • The decision to extend a trade beyond one day exposes the order to overnight price changes, which can work both for and against the order. This week we explored the overnight price change trends between 2009 and 2016 across three market cap groups for actively traded US stocks by institutional investors in our Peer Group Database.
  • The top chart shows overnight risk as the average of the absolute price change between close and next day open across the stocks in the universe for each one -year period. Looking at the trends in price change, we see that overnight risk has decreased significantly since 2009 (around the time of the financial crisis) to 2014. Since 2014, overnight risk has increased from this dip across all market caps.  Side-adjusted overnight risk (not shown) is close to zero.
  • We also calculated the Implementation Shortfall cost attributed to trades executed on the second day of a two-day order within this same universe.  We consistently see second day costs across market caps. For more information about the costs attributed to trades executed on the second day, please refer to our previously published article, “What is the cost of extending an order by a day
  • The risk associated with extending the order might be greater than the additional impact of trading more, particularly at the end of the day when liquidity is cheap.

ITG Peer Group Database contains order-level information from approximately 180 buy-side institutions.  The Peer active stock universe is selected from ITG Peer Group database with stocks traded in all eight years, over 100 million dollars in each year. Overnight risk is defined as the average of the absolute price change between close and next day open across the stocks in the universe for each one-year period.  Implementation shortfall costs are measured relative to the release to the desk and are expressed in basis points. Large Cap stocks are defined as those with a market cap greater than $5 billion (USD), Mid Cap stocks are defined as those with a market cap between $1.5 - $5 billion (USD), and Small Cap stocks are defined as those with a market cap between $150 million (USD) and $500 million (USD).

Refer to Peer Related Analytics for information available on Equity Related Analytics.

You may have a question or want to share your view with others in our community, please join the Incubator community and submit your entry or send us an email

 

Comments

You must be logged in to post a comment.

Please sign in or sign up.