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Restraining Participation: The Effect of Limit Prices on Consistency Scores

The theory of constraints states that the throughput of any system is determined by one constraint (bottleneck). Thus to increase the efficiency of a process, one must focus on identifying and improving the bottleneck or constraint. 

One of the constraints often placed on traders is the use of limit prices. We have seen that this hurts trading outputs, leading us to track what we call a consistency score. Let’s investigate further. 

Institutional Insanity

Mark Northwood – Consultant at Bips Global discusses why

Too many investment firms are still repeating the same mistakes…

There is virtue in being consistent. It suits certain processes, such as where the goal is an end product with minimal variation like a phone or a fizzy drink. Institutional Investment is a tricky business though, and while most institutional investors describe their “investment process” as if it were sticking to a fixed set of rules to make decisions, there are still human analysts, portfolio managers (PMs) and traders involved too. And humans are, well… human.

The new buy side toolkit

From broker and algo wheels to alpha profiling and scorecards, best execution is changing rapidly and traders are enthused by the opportunities ahead.

Amidst rising costs, squeezed profit margins and onerous regulations, it might not seem the ideal time to be a buy-side trader, but in fact there may never have been a better time.

Blueprint for best execution

Tools to reduce subjectivity in the selection of brokers and strategies yield new efficiencies and improve performance among asset managers.

Three months on, MiFID II gets a mixed report

After three months, MiFID II still evokes mixed feelings and some components may need to be reviewed, but it has had some positive effects.

Alpha profiling, strategy toolkits, broker scorecards: The keys to best execution?

Various tools are emerging to help buy-side firms optimise their broker selection for best execution. Examples include algo wheels, broker scorecards and bracketing frameworks that allow for effective monitoring of broker performance on an ongoing basis.

Integrating portfolio management and trading.  It is critical that portfolio management communicates enough information to allow the trader to employ the optimal trading strategy for each portfolio manager or fund strategy.  Does it makes sense to give the full order size to a trader on the first day or trading?  It largely depends on market timing ability.

A reasonable question without industry consensus.  Does a broker wheel or broker scorecard help?  The real answer is less a better scorecard or fancier switching engine and more for the buy-side to take back control of the execution process itself.

Increasing the efficiency of a process normally requires identifying and removing constraints wherever possible. Trading is no different. Let's see how limit prices can affect trading success.

Transaction Cost Analysis can be a daunting task. Trading data takes the form of a vast array of numbers which would be impossible to sort through without additional guidance. The Trade Timing Chart compresses important patterns in your data into a single display, highlighting the data worthy of a closer look.

Trading consistently throughout market conditions can help to reduce harmful biases and trading costs. Algorithms which are strictly governed by historical trading patterns, however, can lead to high costs when deviations occur. This article proposes a middle ground that seeks to gain the benefits of consistency without the costs of strict adherence to a Percent of Volume algorithm.

Total Trading Cost Framework

Quantifying the cost of trading is a process often fraught with disagreements. These often result from the differing time frames and restrictions that investment agents use for making decisions. Trade Informatics seeks to mitigate these differences of opinion through a Total Trading Cost Framework.

Periodic post-trade reports are an undeniably helpful tool for improving trading performance. If used in isolation, however, they can create more questions than answers and lead to frustration with the process of transaction cost analysis. Through a more comprehensive process of transaction cost analysis, the vast and ever-increasing quantities of data available can be combined with the experience and skill of investment agents to ensure firms maximize their realized returns.

Trade Informatics uses an internally-developed Transaction Cost Model (TCM) for a variety of purposes.  This summary focuses on the pre-trade forecast, and several other basic aspects of our approach.

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