Measuring Trade Difficulty
Measuring Trade Difficulty
Measuring Trade Difficulty
-
-- mtr
ffi
#* frs ffir ..F1* Htr
-&* & ffit
We at Plexus are often asked "What is the arising from independently derived prospects or
optimal shares, size, timing, etc. given our indMdual liquidity requirements. The supply (or
management style?" We have found no easy demand) is likely to be thin and sporadic.
answer. Trades are not alike. They differ in the
ease or difficulty of execution. Again according to Loeb, a $5 million trade in a
$200 million company might cost 2.5 times as
Several factors combine to increase difficultv: much as a $500,000trade.
6061#ilsl"rir* *q:*ievarc{, $*ife 3tr* l-l Sar:t*;Vl*nie*, e#ifurnla *S4.*f u {313}S"SI-5*?S il r,4"X i*l3} 394-6i3S
3.The direction of or participate orders imply medium urgency.
stock price move- Limit or crossing orders signal low urgency. A
iiiii:i:ii:iStoek:Priice::i.i.l
ment at the time of manager willing to chance that a limit order
desired execution. might not execute clearly isn't jumping on a hot
:.llllllll*i...Iff"tl:l::::l Stockprices rise when news item.
the number of
potential buyers To summarize, we have defined four factors
exceeds the number of potential sellers. A buyer whose combined effect will determine trade
moving into a crowd of buyers will face adverse difficulty and expected cost of transacting. The
trading conditions: the order is on the same side current weights in use by Plexus are:
as the crowd. The only way he or she can
complete the trade and take the prize is to outbid liquidity
Relative 25Vo
other potential buyers. fn contrast, a buyer (shares desired/volume)
moving into a crowd of sellers has the scarce Discretion 30Vo
goods. He or she can tantalize the most anxious (working, principal, etc.)
seller to bid above rivals. Momentum 357o
(individual stock)
Plexus has measured the difference between Capitalization l$Vo
trading in a market coming in and a market (shares outstanding X price)
moving away to be 300 to 800 basis points. This
factor dominates all other mst considerations, The relative weightings of these factors are
ittcluding size of comparry and size of ordcn It updated on the basis of observation, and the
suggests that implementation costs can be lowered database is still buildins.
by earlier manager decisions, before momentum
has been established. The implementation cost -w.w.
savings may well exceed the effects of loss of
claritv of decision.