What types of things do traders do to minimize market risk (as opposed to individual stock risk) when executing a VWAP order? e.g. S&P down x% be more/less agressive with VWAP orders?? Not sure this question makes a lot of sense....?
Near the close a mutual fund, say, finds out that it has had a $10 million inflow of new assets during the day. First thing the manager does is buy futures asap. The reason for buying quickly is to avoid the possibility of the market shooting up overnight and the manager missing out on the gains and underperforming his benchmark. Then the next day, at a modest pace (possibly using VWAP orders) so as to get good executions, the manager will gradually move from futures to the equities he thinks will outperform. I believe Mr. Bright's hypothesis is, if industrywide there is a big inflow of assets, first the futures will go up and then the equities will follow as the assets are redeployed.
Aaron, This is VERY interesting info. Are you saying that the next day the manager will exit his futures position and at the same time, do the same dollar amount per stocks he is interested in? Thanks. nitro
Aaron, A majority of mutual funds does not allows investing in Futures Instrument as disclose by their prospectus. Does these mutual funds managers use ETF's (QQQ, SPY, DIA) as a substitute or are there ways for the fund managers to circumvent thier prospectus bylaws ? Thanks.
Yes, definitely. Especially the index funds. It is very important to the success of the index funds that they don't underperform their index. The way they manage their cash position (have cash on hand for redemptions and put incoming cash to work immediately) and stay fully invested is with futures. I'm not saying Don Bright's hypothesis is correct, mind you. It may be, but with program and basket trading, differences between equities and futures are arbitraged away pretty quickly.
VWAPS are labor intensive if you are manually doing them. What some may find interesting is that we (IB) don't have any minimum sizes. As mentioned many of the funds/institutions like them as they it is hard for the investors to complain when they are reported fills at the volume weighted average price of the day. I posted the info from our web page as it provides a basic explanation. _http://www.interactivebrokers.com/html/tradingInfo/orders/vwapOrders.html _ Volume Weighted Average Price (VWAP) Orders Description To assist customers in reducing execution risk, IB supports guaranteed VWAP orders for large cap stocks. The VWAP for a stock is calculated by adding the dollars traded for every transaction in that stock ("price" x "number of shares traded") and dividing the total shares traded. A VWAP is computed from the open of the market to the market close, and is calculated by volume weighting all transactions during this time period. VWAPs must be entered three minute before market open. All IB VWAP prices will be computed by Bloomberg, displayed by IB after market close, and are guaranteed to be executed. Guaranteed VWAPs are offered at $.02/Share. PLEASE NOTE that once your VWAP order is accepted you CANNOT CANCEL YOUR ORDER. There are important differences between VWAP transactions and ordinary trades.
What is your source? I don't think this is true. The mutual funds I've looked at allow futures. Read the prospectuses carefully -- it is often just a single line. Here's the quote from Fidelity Magellan's prospectus, for example: I don't see any futures holdings listed in the schedule of investments in Magellan's annual report, but I did find this in the Statement of Operations: That number is in thousands... This one mutual fund lost $329 million in equity index futures. Since futures are a zero sum game, the rest of the market participants must have made $329 million. Did you get your share? Or a better question: "What do you have to do to get your share?"
How about maximum size? % of daily volume.... Does IB execute them in-house or do they route to a 3rd party?
at 2 cents a contract what do you think? in house of course. the list of available stocks is on our site. i think we could handle any size in those stocks.