Beating VWAP

Discussion in 'Strategy Development' started by bigdaddyreedo, Apr 9, 2006.

  1. Hi guys

    Just begun a new job as an institutional dealer. Basically, my job is executing large institutional equities orders. I was wondering if there was anyone out there who has/does perform a similiar role and has some experience and ideas in how best to go about this. For example, a client calls up with 1 million shares of XYZ to sell over the day (seems a lot like day trading to me).In particular, real world experience you wouldnt neccesarily find in a textbook, but all advice is welcome. Just looking to feed off the advice of those who have walked this path before me. I am particularily interested in your methods or techniques used for beating VWAP in terms of big orders. It seems this is the benchmark all dealers are judged by. As I mentioned previously, it would seem that executing orders of this nature, big orders to be done over a single day, would have a lot of similarities to techniques used by succesful day traders.

    Many thanks.

    Big D
  2. do you mind telling us what prior exp you had in equities to have gotten such a job and how come
    you do not have knowledge from that exp to answer your own question ?

    maybe you will get lucky here and someone with
    principal vs agency executions or program trading knowledge will be able to give you some pointers
  3. nitro


    This is probably one of the toughest questions to ask, and if someone really knows the answer, it is probably worth alot of money to them.

  4. FredBloggs

    FredBloggs Guest

    hmmm sorry, but im with setharb. something smells too fishy - and it aint that neptune pizza sitting on my desk (classy guy :) )

    there is no solid answer (is there ever?)

    it really does depend on what stock xyz is, liquidity, sector, news, pr's etc etc.

    my advise would be to try honesty. it goes a lot further. trust me.
  5. Everything I said in my email was true. I am at present, the most junior guy on the desk and am basically just an order taker for the senior guys whilst I learn the ropes and feed off their experience. I thought I would be a bit proactive and see if I could pick the brains of a few more experienced folks to speed up the learning process. If you dont know, dont care, thats fine by me. What isnt fine is having my honesty brought into question. Granted, perhaps I should have elaborated on how insignificant and minor my role is at present, would that have made you feel better? The bottom line is, in a few months/a year it will be my responsibility to execute large insto orders at hopefully better than VWAP. All I was asking for is some knowledge that may help me in this regard. A pointer to a decent book, a decent article, an interesting insight or a "hey, I dont know but....." Not for an indictment on my character. IS it really such a sin for someone who is looking to learn to ask for advice?
  6. "marketmaker's edge" is an interesting book to start off with.
  7. azmi


    bigdaddy..a few words of caution.
    since you are as you say new to the job and the junior guy at the desk.
    this is the last place you will want to post a thread like this - you will find very few traders here with the background you are looking for..and most dont even bother posting here. The few peope who would respond will be more interested in how you got this job - cause they want one like it too...and poke cheap shots at your for not being smart enought to know the answers already. Dont pay attention to them.
    Talk to your colleagues...develop a repor with them. Since you are junior - no one will expect you to hit home runs off the bat. Communication is an essential ingredient. Be vigilant of how other traders execute block size - most use block-trading executation platforms offered by numerous firms allowing traders to match block sizes (usually 100k shares and above) at the current level 1 price. eg are GS, Citi, pipeline etc...there are several. When a customer calls to sell/buy a million shares he would normally expect you to work the order - unless he has a specific price in his mind in which case its a limit order and you just post your price and quantity and hope and pray you get hit. If the market knows you have a large order to sell -which it usually does - then you are caught cause markets makers (if its nasdaq) or the specialist (if its NYSE) may force you to sell at a worse price than had you been more discrete.
    the other way is ofcourse simply hitting the bid at every level until you have sold your lot - this might cause the price to drop by quite a few cents depending on the liquidity of the stock. LU wont even budge on a million shares where as RIMM might drop anywhere from 20-50 cents. So depends on the stock and on your assessment of where its heading.
  8. kind words - and good advice.

    I use Trade ideas and wonder if this is something you'd use or how it stacks up against the other tools you have access to. Want to know if I'm playing with a pro or kid's tool.
  9. tpxtrd


    I am in a junior role at a hedge fund and I/our trading desk deals with equities sales traders like yourself probably.

    As for good execution, I suggest you first learn how VWAP and its varients work. Read "Optimal Trading Strategies" by Kissell. I did and it was ok but has a lot of errors and some of the conclusions suck I think. But it'll give you a lot of good info on what you are dealing with if you are on a vwap benchmark or implementation shortfall.

    At the end of the day, equities sales traders likely aren't gonna beat algo executions on average for large cap very liquid stocks that have tight spreads, but you will service the buyside by providing info on your desk flow and keeping fund traders/PMs up to date with general market news, stock prices. Not to mention the commish will be higher for a sales trader execution over algo. But the more difficult orders(i.e. very illiquid stocks, wide spreads, huge % of ADV) will probably allow a skilled trader to beat algo performance.
    #10     Apr 10, 2006