Optimal Trading Strategies: Quantitative Approaches for Managing Market Impact and Trading Risk

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9780814407240: Optimal Trading Strategies: Quantitative Approaches for Managing Market Impact and Trading Risk
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Everyday financial professionals are required to make important decisions regarding how best to execute an investment decision. The process entails estimating transaction costs, forecasting market impact and risk, evaluating alternative strategies, developing optimal trading strategies, choosing agency transaction or principal bid, and selecting the most suitable broker-dealer. Investors know all too well that trading too aggressively will cause too high market impact cost, but trading too passively will expose the fund to more risk, which may result in even higher costs. Investors need to find an appropriate balance between cost and risk, given the goals and objectives of the fund. Improper implementation will effectively erode much of the value added during the investment process and may ultimately cause investors to lose profits and funds to lose investors.

How can you maximize value instead? The answer lies in the proactive management of transaction costs and selection of trading strategy, the process to which this book is dedicated. Optimal Trading Strategies presents well-developed methodologies for managing and reducing costs throughout all stages of the investment cycle. You will find:

· Quantitative techniques for estimating, analyzing, and managing transaction costs
· A framework for forecasting market impact and risk
· Methodologies to develop optimal trading strategies
· A process to achieve best execution
· Metrics for measuring costs and evaluating performance

Consider this: Two money managers invest in and hold identical portfolios but one manager consistently outperforms the other by as much as 50 to100 basis points per quarter. The more successful manager is inevitably the one who better manages trading costs. In a highly competitive environment where every basis point counts, it is critical to seize every foreseeable advantage for your investors. By using the framework and techniques presented in this book, you will better position yourself to achieve higher portfolio returns.

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Book Description:

"The decisions that investment professionals and fund managers make have a direct impact on investor return. Unfortunately, the best implementation methodologies are not widely disseminated throughout the professional community, compromising the best interests of funds, their managers, and ultimately the individual investor. But now there is a strategy that lets professionals make better decisions. This valuable reference answers crucial questions such as:

* How do I compare strategies?

* Should I trade aggressively or passively?

* How do I estimate trading costs, ""slice"" an order, and measure performance?

and dozens more. Optimal Trading Strategies is the first book to give professionals the methodology and framework they need to make educated implementation decisions based on the objectives and goals of the funds they manage and the clients they serve."

From the Inside Flap:

If you are a financial professional concerned with transaction costs--as a plan sponsor, fund manager, trader, broker, analyst, consultant, sophisticated individual investor, or student--if you are trading programs, portfolios, baskets, or blocks--this book is essential reading. It will introduce you to financial implementation decision-making, show you how to employ quantitative methods to manage trading costs throughout all phases of the investment cycle, and ultimately help to uncover techniques and strategies to reduce costs and increase portfolio returns.

The overriding methodology in Optimal Trading Strategies has been developed from the viewpoint of investors. It provides a foundation for evaluating trading-related decisions in the same manner CAPM and APT provides for investment-related decisions and Black-Scholes provides for option pricing. The text is enhanced through extensively developed financial theory, statistical models, and is reinforced with illustrative examples.

With scientific rigor, the authors analyze typical problems that arise during the implementation phase of the investment cycle. They present a framework to estimate costs, forecast market impact and timing risk, and develop optimal trading strategies. You will learn how to determine the strategy that meets the goals and objectives of the fund, and achieve best execution. The book provides proven techniques for answering such questions as:

· How do I estimate trading costs?
· How do I forecast market impact and timing risk?
· How do I develop optimal trading strategies?
· How do I choose between agency execution and principal bid?
· How do I select the most suitable broker/dealer arrangement: traditional broker, ECN, or crossing system?
· How do I measure transaction costs?
· How do I evaluate performance?
· How do I achieve best execution?

Specifically, the book presents cutting-edge advancements such as Robert Almgren and Neil Chriss’ Efficient Trading Frontier (ETF), which shows the optimal trade-off between trading costs and timing risks, and introduces the concept of a Capital Trade Line (CTL), a means for allocating between agency execution and principal bid transaction. Further, it offers a blueprint for computing the economic fair value (FV) for a principal bid from the investor’s viewpoint, and an optimization formulation to solve the trader’s dilemma. Naturally, it spells out techniques for incorporating transaction costs directly into investment decisions to improve portfolio returns. By disseminating state-of-the-art implementation methodologies to the professional community, Optimal Trading Strategies will aid you in making more effective financial decisions.

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