Read to gain insight from ITG perspectives and proprietary research on best practices in trading and portfolio analytics.
It’s hard to forget the hectic months of late 2008, when a spate of rule changes around short selling helped send unsteady markets into a frenzy. Emergency measures intended to curb the falling prices of financial stocks prohibiting short-selling did not achieve their desired effects, and wound up depriving the market of desperately-needed liquidity.
Dark pools, on aggregate, add significant value relative to lit markets when measured in terms of execution efficiency. A detailed analysis shows differences in performance across the different types of dark pools as well as certain niches in which they excel. In general, fragmentation and overall market performance as measured by execution efficiency don’t seem to degrade relative to results from the pre-MiFID era. MiFID II proposals can further enhance the ability of market participants to accurately measure the different liquidity pools.
ITG Financial Engineering has recently completed its R&D work on international stock specific intraday volume profiles, extending its robust estimation methodology to common stocks and several other security types to cover more than 50 markets around the world.
On July 3 of this year, the courts pronounced caveat emptor with respect to execution performance in the FX market. U.S. District Judge Denise Cote threw out a lawsuit, which accused JPMorgan Chase & Co. of breaching a fiduciary duty to custodial clients by charging “hidden and excessive mark-ups” on currency trades. Judge Lewis Kaplan dismissed a lawsuit directed at officials of Bank of New York Mellon, for ignoring “red flags” or knowing that trades were being processed at the worst or near-worst prices of the day.
The advantages of algorithmic trading have popularized algorithms to the extent that most major brokers, and some technology providers, offer the service in some form. Recent studies suggest that anonymity, reduced market impact, trading efficiency, and lowering the overall cost of trading are drivers of the trend from the customer perspective.
“The most valuable commodity I know of is information” – to quote Gordon Gekko from the 1987 movie classic Wall Street. This line has never been more significant than in today’s data-fuelled financial markets, where detailed analysis of information can provide that all important competitive edge – both now and in the future.
Since the Federal Open Market Committee (FOMC) began announcing its policy decisions in 1994, its meetings have been watched closely by stock market pundits and practitioners. This is hardly surprising, as the federal funds rate target announced at the end of FOMC meetings is widely viewed as a leading indicator of the US economy.
Shortly after the market opening on August 1st 2012, a single server owned by Knight Capital flooded the market with persistent buy and sell trades as it attempted to fill 212 small customer orders in 154 U.S. stocks. According to the SEC press release,1 the surge of trading activity caused by a faulty code deployment resulted in execution of 4 million child orders for almost 400 million shares during the first 45 minutes after the market opening.
We investigate the context in which the issue of capacity arises in the investment management process. We focus on the increasing market-impact costs for liquidity- demanding equity strategies as a function of trading volume and turnover for typical trade lists. We simulate historical monthly alphas for a generic long-short equity strategy and use historical returns plus stock-specific market-impact cost estimates to compare performance as assets under management increase. Where appropriate, we interpret our results within the framework of the Fundamental Law of Active Management.
This study represents the first performance analysis of European venues since the implementation of MiFID. Alternative trading markets are found to add value relative to primary markets, lowering trading transaction costs.