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Mark Buchanan
+ 44 207 888 0908
Ma rk.k.bucha na n@credit-suisse.com
Liesbeth Baudewyn
+ 44 207 888 7988
Liesbeth.ba udewyn@credit-suisse.com
Trading Strategy
Xiang Lin
+ 44 207 888 0974
Xia ng.lin@credit-suisse.com
2 October 2013
Key Points
(212
(
Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013
TRADING STRATEGY
Worse performance
Higher
standard
deviation
Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013
However, as you move beyond the top markets to consider the smaller and less
developed markets in Europe, both the average slippage and standard deviation
of performance versus VWAP increase substantially. For example, average
slippage in South Africa is 3.3x that of the UK, while Turkey is even more
expensive and variable.
Worse performance
Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013
TRADING STRATEGY
How We Calculate Spread Cost
For each individual child level fill, we compare the
execution price with the prevailing near touch quote
on the primary market. Spread cost is the weighted
average of the difference between these two
numbers expressed in basis points.
Worse performance
Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013
Why does Turkey have such high spread costs? This is partly because the tick
size structure in Turkey forces bid-ask spreads to be wide (see Exhibit 1 and
Global Equity Markets Handbook - Feb 2013 for further details). The resulting
high depth of book in Turkey means that a significant amount of volume can be
taken from the near-touch without ever reaching the traders VWAP order. The
trader is therefore often forced to pay the spread more often than he/she would
like to relative to other markets.
Poland is another interesting case. Although its spread costs are comparable to
those of the lowest cost markets, the fact that it has one of the least stable
intra-day volume profiles makes it challenging to match VWAP (see Exhibit 3).
Euro Crisis
Since bid-ask spreads and volatility are highly correlated (see Europe Chartbook
(Aug-13) for further details) it is not surprising to find that matching the VWAP
benchmark is tougher during periods of high volatility (see Exhibit 6).
Anecdotally, it may also be the case that traders need to pay the spread more
often in high volatility environments and that volume profiles are less stable (see
Executing in Earnings is Extra Expensive for further details).
3
Source: Credit Suisse Trading Strategy, January 2007 August 2013
TRADING STRATEGY
There are three main reasons why exposure to dark pools is likely to reduce
slippage versus VWAP. First, dark pools help traders reduce signalling costs. In
Measuring Dark Pools' Impact and The Cost of Primary Market Only Execution
we found that posting even small orders on lit markets can cause prices to move
against the trader (see Exhibit 8). Second, by facilitating execution within the bidask spread dark pools help traders reduce their spread costs. Thirdly, dark pool
prints allow VWAP algos to slice orders into even smaller waves and therefore
better match a stocks actual volume profile.
Approach to Analysis
To test this theory, we analysed the performance of Credit Suisse VWAP
tactics during 2013 and split the sample into those exposed to the dark (i.e.
Credit Suisse Crossfinder and MTF dark pools) and those not. We paired the
samples so they are similar with respect to trade difficulty, as measured by
%ADV, bid-ask spread and participation rate. We have considered only market
orders that were fully filled and trades impacted by extreme price moves have
been excluded.
Bid Imbalance
Ask Imbalance
Results
On average trades exposed to the dark outperformed on a relative basis versus
VWAP across every trade size bucket (see Exhibit 9). Overall, the relative
outperformance was 0.94bps and the difference in performance was
statistically significant at the 5% level. We also found that orders exposed to
the dark had slightly lower variability of performance versus VWAP. As the other
meaningful factors were controlled for in the construction of the two samples,
there is evidence to suggest a link between exposure to the dark and execution
performance
-15.2%
-18.7%
-19.5%
-57.0%
-30.8%
Worse performance
Source: Credit Suisse AES Analysis, January 1st August 30th, 2013
TRADING STRATEGY
Since the closing print accounts for around 15% of average daily volume in
Europe, it could reasonably be expected to have a significant influence on the
market wide VWAP. Our analysis, which compares the VWAP price during
continuous trading with the full day VWAP, suggests that is indeed the case
(see Exhibit 11).
Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013
TRADING STRATEGY
Credit Suisse
Trading Strategy
USA
Phil Mackintosh
Victor Lin
Ana Avramovic
Stephen Casciano
phil.mackintosh@credit-suisse.com
victor.lin@credit-suisse.com
ana.avramovic@credit-suisse.com
stephen.casciano@credit-suisse.com
Europe
Mark Buchanan
Colin Goldin
Liesbeth Baudewyn
mark.k.buchanan@credit-suisse.com
colin.goldin@credit-suisse.com
liesbeth.baudewyn@credit-suisse.com
Asia
Karan Karia
karan.karia@credit-suisse.com
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