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What this chapter covers:
Problem Type A: Identifying Trading Motivation
Problem Type B: Selecting Appropriate Strategy
Problem:
Given:
Answer:
❌ Mistake 1: Ignoring Alpha Decay
❌ Mistake 2: Not Considering Fund Mandate
Focus on understanding the interplay between different trading motivations and how they influence the choice of trading strategies. Pay attention to the urgency associated with each motivation.
What this chapter covers:
Problem Type A: Assessing Market Impact
Problem Type B: Selecting Strategy Based on Liquidity
Problem:
Given:
Answer:
❌ Mistake 1: Ignoring Market Conditions
❌ Mistake 2: Overlooking Alpha Decay
Understand how order characteristics, security characteristics, market conditions, and risk aversion interact to influence the optimal trading strategy.
What this chapter covers:
Problem Type A: Selecting a Pre-Trade Benchmark
Problem Type B: Choosing Between VWAP and TWAP
Problem:
Given:
Answer:
❌ Mistake 1: Using the Wrong Benchmark
❌ Mistake 2: Ignoring Market Conditions
Understand the strengths and weaknesses of each reference price and how they align with different trading strategies and objectives.
What this chapter covers:
Problem Type A: Selecting a Strategy for Short-Term Alpha
Problem Type B: Implementing a Risk Rebalance Trade
Problem:
Given:
Answer:
❌ Mistake 1: Ignoring Liquidity
❌ Mistake 2: Not Adjusting for Market Conditions
Focus on understanding the specific characteristics of each trade type and how to select a strategy that aligns with those characteristics.
What this chapter covers:
Problem Type A: Choosing Between High-Touch and Algorithmic Trading
Problem Type B: Selecting an Execution Algorithm
Problem:
Given:
Answer:
❌ Mistake 1: Using the Wrong Algorithm
❌ Mistake 2: Ignoring Market Impact
Understand the different types of execution algorithms and their applications. Pay attention to the trade-offs between speed, market impact, and cost.
What this chapter covers:
Problem Type A: Selecting a Market for Trading
Problem Type B: Implementing a Trade in Fixed Income
Problem:
Given:
Answer:
❌ Mistake 1: Applying Equity Strategies to Fixed Income
❌ Mistake 2: Ignoring Market Structure
Focus on understanding the market structure and transparency of different asset classes and how they impact trade implementation.
What this chapter covers:
Problem Type A: Calculating Implementation Shortfall
Problem Type B: Reducing Delay Cost
Problem:
Given:
Answer:
❌ Mistake 1: Ignoring Delay Cost
❌ Mistake 2: Not Monitoring Broker Performance
Understand the components of implementation shortfall and how to minimize each component.
What this chapter covers:
Problem Type A: Calculating Arrival Cost
Problem Type B: Calculating Market-Adjusted Cost
Problem:
Given:
Answer:
❌ Mistake 1: Using the Wrong Benchmark
❌ Mistake 2: Ignoring Market Movement
Understand the different benchmarks for trade execution and how to use them to evaluate trading performance.
What this chapter covers:
Problem Type A: Evaluating a Trade Policy Document
Problem Type B: Determining Best Execution
Problem:
Given:
Answer:
❌ Mistake 1: Lack of a Trade Policy Document
❌ Mistake 2: Ignoring Monitoring of Execution Arrangements
Understand the key components of trade governance and how to evaluate a firm's trading procedures.