The portfolio manager needs to be familiar with market microstructure: the market structures and processes that affect how trades are executed represented by trade prices and volumes.
Trang 1Reading 35 Execution of Portfolio Decisions
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Three elements of investment process are securities
research, portfolio management and securities trading
Duties of a portfolio manager includes:
• Effective communication with traders
• Ability to evaluate the quality of the execution services
• Performance of fiduciary responsibility
2 THE CONTEXT OF TRADING: MARKET MICROSTRUCTURE
The portfolio manager needs to be familiar with market
microstructure: the market structures and price The
portfolio manager needs to be familiar with market
microstructure: the market structures and processes that
affect how trades are executed (represented by trade
prices and volumes)
Following are the two major types of orders that traders
use:
Market Order
A market order is an instruction to execute an order
promptly in the public market at the best price
available A market order:
• Emphasizes immediacy of execution
• Bears some degree of price uncertainty
(uncertainty about the price at which the order will
be executed)
NOTE:
In today’s market, most market orders are effectively
automated
Limit Order
A limit order is an instruction to trade at a price that is at
least as good as the limit price specified in the order For
buy orders, the trade price must not exceed the limit
price, and for sell orders, the trade price must be at least
as high as the limit price A limit order:
• Emphasizes price
• Has execution uncertainty
NOTE:
The order also specifies an expiry date
A few additional order types that represent variations on
the market and limit orders are as follows:
Market-not-held order
• A variation of the market order designed to give the agent greater discretion than a simple market
order ‘Not held’ means the broker is not required
to trade at any specific price or in any specific time interval, as would be required with a simple market order
Participate (do not initiate) order
• A variant of the market-not-held order in which a broker waits for and responds to initiatives of more active traders, in the hope of capturing a better
price
Best efforts order
• This type of order gives the trader’s agent even more discretion to work the order
Undisclosed limit order/reserve/hidden/iceberg order
• This is a limit order that includes an instruction not
to show more than some maximum quantity of the unfilled order
Market on open order
• This is a market order to be executed at the
opening of the market Similarly a market on close order is a market order to be executed at market
close
Types of Trades Principal trades
A principal trade is a trade with a broker in which the broker commits capital to facilitate the prompt execution of the trader’s order Such trades are used most when the order:
• Is larger and/or
• More urgent than can be accommodated within the normal flow of trading
Portfolio trades
Trang 2A portfolio trade involves an order to trade in a specific
basket (list) of securities Portfolio trades are:
• Relatively low cost because diversification (implied
by multiple security issues) reduces the risk to the
other side of the trade
2.2.1) Quote-Driven (Dealer) Markets
Quote-driven markets are markets in which trades are
executed with a dealer—a business entity that is ready
to take the other side of an order to buy or sell an asset
at established firm prices
• A dealer’s bid price is the price at which he/she
will buy a security, and the ask price is the price at
which he/she will sell a security The quantities
associated with the bid and ask price are known
as the bid size and ask size respectively
• The inside bid or market bid is the highest and best
bid The inside ask or market ask is the lowest or
best ask The market bid and ask prices make up
the inside quote or market quote and the
difference between them is the inside or market
bid-ask spread (inside ask less inside bid) The
midquote is halfway between the market bid and
ask prices
• A closed-book market is a market in which the
limit order book is not visible to the public, and
traders rely on brokers to locate the best price
• In a ‘pure’ dealer market, a dealer is a
counterparty to every trade and public traders’
limit orders do not compete with dealers’ bids and
asks
Dealers’ Role
Dealers can help in the following ways:
• Dealers help markets operate continuously by
being ready to the opposite side of the trade
(especially in markets that lack natural liquidity)
• Dealers passively provide immediacy or bridge
liquidity, the price of which is the bid-ask spread
(they sometimes also take an active role in price
setting to turn over inventory)
• Dealers play an important role in markets requiring
negotiation of the terms of the instrument, such as
forward and swap markets
Trade Costs
The following are measures of trade costs:
• The size of the quoted bid-ask spread as a
proportion of the quote midpoint
• The effective spread is the spread at which a
trader actually transacts Sometimes a dealer steps
in front of an order to improve on the prior best ask
or bid price to take an incoming market order The
price improvement will result in an effective spread that is lower than the quoted spread
o The effective spread is a better representation of the true cost of a transaction because it
captures both price improvement and market
impact
NOTE:
• The average effective spread is the mean effective spread of over all transactions in the stock in the period under study
• Spreads are wider for riskier and less liquid securities
2.2.2) Order-Driven Markets
Order driven markets are markets in which trades take place between public investors, usually without intermediation by designated dealers Public limit orders establish transaction prices In order-driven markets:
• There might be more competition for orders
• A trade may be delayed, or may not be executed
at all because a dealer is not present (execution uncertainty)
• Traders cannot choose with whom they trade because a pre-specified set of rules governs the execution of orders
Examples:
Toronto Stock Exchange for equities, International Securities Exchange for options, and Hotspot FX for foreign exchange
Types of Order-Driven Markets
1 Electronic Crossing Networks
These are markets in which buy and sell orders are batched and crossed at a specific point in time
Crossing networks mainly serve institutional investors
Some benefits are as follows:
• Both buyers and sellers avoid the costs of dealer services
• Traders avoid the effects a large order can have
on execution prices (market impact)
• It prevents information leakage
• Anonymity of traders is preserved
• Commissions are paid but are typically low
Some drawbacks are as follows:
Practice: Example 1 Volume 6, Reading 35
Trang 3• Participants cannot be guaranteed that their
trades will find an opposing match (execution
uncertainty)
• Crossing networks provide no price discovery (the
adjustment of prices to equilibrate supply and
demand)
2 Auction Markets
These are markets in which the orders of multiple buyers
compete for execution Auction markets can further be
categorized into:
• Periodic or batch auction markets (where trading
occurs at a single price at a pre-specified point in
time) An example is the reopening of the Tokyo
Stock Exchange after the lunch break
• Continuous auction markets (where trades are
executed at any time during the day)
In contrast to electronic crossing networks, auction
markets:
• Provide price discovery
• Lessen the problem of partial fills
3 Automated Auctions (Electronic Limit-Order
Markets)
These are computer-based auctions that operate
continuously within the day using a specified set of rules
to execute orders Electronic communications networks
(ECNs), such as Paris Bourse in France, are an example
of automated auctions for equities
In contrast to crossing networks, ECNs:
• Operate continuously
• Provide price discovery
Like crossing networks, ECNs:
• Provide anonymity
• Are computer-based
2.2.3) Brokered Markets
Brokered markets are markets in which transactions take
place through brokers, away from public markets The
brokers collect commission for representation of the
trade These markets are important:
• In countries where public markets are small
• Where it is difficult to find liquidity
• For block transactions (a block order is large
relative to the liquidity ordinarily available from
dealers or other markets), in which a broker might
occasionally position a portion of the block (act as
a principal with capital at risk)
NOTE:
Many parties can and do perform parts of dealer functions Hence market classifications are simplifications
2.2.4) Hybrid Markets
Hybrid markets are combinations of the previously
described market types An example is the NYSE, which
offers elements of batch auction market, continuous auction markets and quote-driven markets
2.3 The Roles of Brokers and Dealers Brokers
A broker is an agent of the investor In return for a commission, the broker provides services including the following:
• Representing the order: The broker’s primary task is
to represent the order to the market
• Finding the opposite side of a trade: The broker
locates the buyer or seller for the trade and may, in return for compensation, act as a dealer by buying and selling shares for his own account
• Supplying market information: Market intelligence
provided by the broker can be valuable, including information about the identity of traders and the strength of trading interest
• Providing discretion and secrecy: Brokers help in
preserving the anonymity of the traders’ trading intentions Such secrecy does not extend to the selected broker
• Providing other supporting investment services: A
broker may provide a range of other services including providing financing, record keeping, cash management, and safekeeping of securities (such services and more are provided in relationships
known as prime brokerage)
• Supporting the market mechanism: Brokerage
commissions indirectly assure the continuance of the needed market facilities
Dealers
The relationship between the trader and a dealer is adversarial
• A dealer gains from wider bid-ask spreads while the trader gains from narrower bid-ask spreads
• Dealers want to know who is active in the market, how informed traders are, and how urgent their interest in transacting with the dealer is, in order to
manage profits and adverse selection risk (the risk
of trading with a more informed trader) The trader
does not want the dealer to know these facts
• Buy-side traders are often strongly influenced by sell-side traders such as dealers The buy-side trader should manage the relationships with dealers, remembering that his first allegiance is to
his clients
2.4 Evaluating Market Quality
Trang 4Markets quality can be judged by the degree to which it
provides:
• Liquidity
• Transparency
• Assurity of completion
1 Liquidity
A liquid market has the following characteristics:
• The market has relatively low bid-ask spreads:
Such a market is called ‘tight’ Quoted and
effective spreads are low
• The market is deep: Depth means that big trades
tend not to cause large price movements Deep
markets have high quoted depth (quantity
available for trading) Costs of trading large
amounts of an asset are relatively small
• The market is resilient: Discrepancies between
market price and intrinsic value tend to be small
and corrected quickly
Following factors contribute to making a market liquid:
• Many buyers and sellers: This increases the chance
of locating the opposite side of a trade at a
competitive price
• Diversity of opinion, information, and investment
needs among market participants: If investors are
alike, they will make similar trades Diversity in the
factors described above increases the chance
that a buyer of a security can find a seller In
general, a large pool of investors enhances
diversity
• Convenience: A readily accessible physical
location or a well thought out electronic platform
attracts investors
• Market Integrity: Ethical rules set by market
operatives and effective regulation play a major
role in increasing public confidence in the
market’s integrity
The advantages of liquidity include the following:
• Traders can trade rapidly without a major impact
on price
• Information motivated traders can trade easily
bringing their insights into security prices
• Corporations can attract capital easily Investors
will pay a premium for securities that possess
liquidity Higher security prices will enhance
corporate value and lower the cost of capital
2 Transparency
Transparency ensures that:
• Individuals can quickly, easily and inexpensively obtain accurate information about quotes and
trades pretrade transparency
• Details on completed trades are quickly and
accurately reported to the public—post-trade transparency
3 Assurity of Completion
Traders need to be sure that all parties to a trade will honor their commitments Assurity of completion depends on assurity of the contract (the parties to trades are held to fulfilling their obligations) Clearing entities that guarantee both sides of the trade can help ensure assurity of
completion
Practice: Example 3 & 4, Volume 6, Reading 35
Trang 53 THE COSTS OF TRADING
Trading costs have two major components:
Explicit costs are direct costs of trading, such as broker
commission costs, taxes, stamp duties, and fees paid to
exchanges
Implicit costs represent indirect trading costs They
include the following:
• The bid-ask spread
• Market impact (or price impact) is the effect of the
trade on transaction prices (for example, a large
buy order may push the market ask price of a
stock up, so that the remaining order is executed
at a higher ask)
• Missed trade opportunity costs arise from the
failure to execute a trade in a timely manner If a
trader places a limit order to buy a stock at a price
of 99.00 but the ask is 99.04 the order will not
execute Suppose the stock closes at 99.80 The
difference (99.80-99.04= $0.76) reflects the missed
trade opportunity cost This estimate could be
quite sensitive to the time frame chosen for
measurement
• Delay costs (also called slippage) arise from the
inability to complete the desired trade
immediately due to its size and the liquidity of
markets While a trade is delayed, information is
leaked into the market
Measurement of Costs
Implicit costs are measured against some price
benchmark
• One benchmark is the time-of-trade midquote,
which is used to calculate the effective spread
• When precise information is lacking, the price
benchmark is sometimes taken to be the
volume-weighted average price (VWAP)
• Opening and closing prices for a security are
alternative benchmarks which use less information
about prices and are less satisfactory (opening
price is much easier to game)
• The most exact approach to cost measurement is
the implementation shortfall approach
Volume-weighted average price
The VWAP of a security is the average price at which the
security traded during the day, where each trade price
is weighted by the fraction of the day’s volume
associated with the trade
Examples:
If a buy order for 500 shares was executed at $157.25 and the VWAP for the stock for the day was $156.00, the estimated implicit cost of the order would be
500($157.25-$156.00) = $625
• VWAP is less informative for trades that represent a large fraction of volume
• VWAP can be gamed especially as the close of trading approaches and the VWAP estimate’s accuracy increases To address this, VWAP could
be measured over multiple days
Implementation Shortfall Approach
Implementation shortfall is defined as the difference between the money return on a notional or paper portfolio in which positions are established at the prevailing price when the decision to trade is made
(called the decision price, the arrival price, or the strike price) and the actual portfolio’s return It correctly
captures all elements of transaction costs (both explicit and implicit)
Implementation shortfall can be analyzed into four
components:
• Explicit costs: commissions, fees and taxes
• Realized profit/loss: reflects the difference
between the execution price and the relevant decision price (usually taken to be the previous day’s close) The calculation is based on the amount of order actually filled
• Delay costs (slippage): reflects the change in price
(close-to-close price movement) over the day an order is placed if the order is not executed that day The calculation is based on the amount of the order actually filled
• Missed trade opportunity cost (unrealized profit/loss): reflects the price difference between
the trade cancellation price and the original benchmark price based on the amount of the order that was not filled
NOTE:
Market movement is a component of the last three of these costs
3.1 TRANSACTION COST COMPONENTS
Practice: Illustration of the calculation of implementation shortfall,
Volume 6, Reading 35
Trang 6NOTE:
• The shortfall computation is simply reversed for
selling—the return on the paper portfolio is
subtracted from the return on the actual portfolio
The application of the implementation shortfall
approach is hampered when:
• An asset trades infrequently because the decision
price is then hard to determine
• A market lacks transparency (accurate price
and/or quote information)
Adjustment for Market Movements
Suppose the implementation cost is 87 bps and the
market has risen by 100 bps over the period of trading If
the beta of the security is 1, then the market model
predicts that the return on the asset equals:
R i =αi + βiRM
Hence, the predicted return will be 1(1%) = 1% (given
that, with daily returns, α will be close to zero) The
market-adjusted implementation shortfall would be
0.87%-1.0% = -0.13%
NOTE:
Some managers measure shortfall with respect to a
portfolio in which component costs are at expected
levels
Comparison of VWAP and Implementation Shortfall
Volume Weighted Average Price Implementation Shortfall Advantages • Easy to
compute
• Easy to understand
• Can be computed quickly
• Works best for comparing smaller trades
in non-trending markets
• Links trading to portfolio manager activity; can relate cost to the value of ideas
• Recognizes the tradeoff between immediacy and price
• Allows attribution
of costs
• Can be built into portfolio
optimizers to reduce turnover and increase realized performance
• Cannot be gamed
Volume Weighted Average Price Implementation Shortfall Disadvantages • Does not
account for costs of trades delayed or canceled
• Becomes misleading when trade is
a substantial proportion of trading volume
• Not sensitive to these trade size or market conditions
• Can be gamed by delaying
trades
• Requires extensive data collection and interpretation
• Imposes an unfamiliar evaluation framework on
traders
Source: Exhibit 6 Volume 6, Reading 35
3.2 Pre-trade Analysis: Econometric Models for Costs
Econometric models can be used to build reliable pre-trade estimates The theory of market microstructure suggests that trading costs are nonlinearly related to certain factors, including the following:
• Stock liquidity characteristics (e.g market
capitalization, price level, volume, trading frequency, bid-ask spread, index membership);
• Risk (e.g the volatility of the stock’s returns);
• Trade size relative to available liquidity (e.g order
size divided by average daily volume);
• Momentum (e.g it is more costly to buy in an up
market than in a down market);
• Trading style (e.g more aggressive styles are
associated with higher costs)
Regression analysis can be used to determine the relationships of the above factors with cost
Uses
The estimated cost function can be used:
• To form a pre-trade estimate of the cost of trading which can then be compared to actual realized costs to assess execution quality
• To help the portfolio manager determine the right trade size to order (for example if expected excess return is 5%, but round-trip transaction costs are also 5%, the excess return would be eroded The optimal trade size should be decreased)
Trang 74 TYPES OF TRADERS AND THEIR PREFERRED ORDER TYPES
4.1 The Types of Traders
Traders can be classified by their motivation to trade, as
follows:
1 Information-motivated traders trade on information
that has limited value if not quickly acted upon They:
• often stress liquidity and speed of execution over
securing a better price
• are likely to use market orders (to hide their
intentions) and rely on market makers
• Often trade in large blocks
2 Value-motivated traders act on value judgments
based on research and trade only when the price
moves into their value range Value traders:
• Trade infrequently and are motivated only by
price
• Trade over lengthy trading horizons and are
patient to secure a better price
3 Liquidity motivated traders do not transact to reap
profit from an information advantage They transact
to release cash proceeds, adjust market exposure, or
fund cash needs, and tend to be counterparties to
more knowledgeable traders
4 Passive traders seek liquidity in their rebalancing
transactions and are much more concerned with the
cost of trading
• They seek lower-cost execution
• Their trades resemble dealers
Some other trader types are as follows:
• Dealers profit by earning bid-ask spreads and
have short trading time horizons
• Arbitrageurs are sensitive to both price and speed
of execution
• Day traders rapidly buy and sell stocks, and like
dealers, often seek to profitably accommodate
the trading demands of others
NOTE:
This classification of traders is relevant to both equity and
fixed-income markets
SUMMARY
Trader Motivation Trading Time
Horizon
Time versus Price Preference
Information-motivated New Information Minutes to hours Time
Value-motivated valuation errors Perceived Days to weeks Price
Liquidity-motivated divest securities Invest cash or Minutes to hours Time
Passive Rebalancing, investing/
divesting cash
Days to weeks Price Dealers and
day traders Accommodation Minutes to hours indifferent Passive,
Source: Exhibit 8 Volume 6, Reading 35
4.2 Traders’ Selection of Order Types
4.2.1) Information-Motivated Traders
Information traders believe that they need to trade immediately and often trade large quantities in specific names These traders:
• may use fast action principal trades
• use less obvious orders, such as market orders, to disguise their trading intentions in order to prevent their information edge from diminishing
4.2.2) Value-Motivated Traders
The value motivated trader develops an estimate of value and waits for market prices to fall in the range of that estimate These traders:
• use limit orders, because price is more important
• Sometimes operate as ‘the dealer’s dealer’, buying stock when dealers want to sell
4.2.3) Liquidity-Motivated Traders
The commitment or release of cash is the primary objective These traders:
• Use market, market-not-held, best efforts, participate, principal traders, portfolio trades, and orders on ECNs and crossing networks
Practice: Example 8
Volume 6, Reading 35
Trang 8• Desire low commissions and small impact, and can
tolerate some execution uncertainty
4.2.4) Passive Traders
Low-cost trading is the mains objective These traders:
• Use limit orders, portfolio trades, and crossing
networks
• Favor low commissions, low impact, and reduction
of bid-ask spreads
• Face execution uncertainty
• Use orders that are best suited to trading that is neither large nor heavily concentrated
5 TRADE EXECUTION DECISIONS AND TACTICS
5.1 Decisions Related to the Handling of a Trade
Considerations include the following:
• Small, liquidity-oriented trades can be executed via
direct market access (DMA) and algorithmic trading
• Large, information-laden trades can be executed
using the skills of senior traders
• The trader must be aware of client trading
restrictions, cash balances, and brokerage
allocations, if any
5.2 Objectives in Trading and Trading Tactics
Following are various types of trading techniques:
5.2.1) Liquidity-at-Any-Cost Trading Focus
This technique is used by information traders who trade
in large block sizes and demand immediacy Traders
with such a focus:
• Usually attract brokers demanding a high
commission rate
• Usually recognize that the methods they use are
expensive but pay the price for timely execution
NOTE:
Sometimes, urgency will place a normally nonaggressive
trader into this category
5.2.2 Costs-Are-Not-Important Trading Focus
Traders with such a focus use market orders (and its
variations) since they trust the market to generate a fair
price They pay ordinary spreads and commissions for
speed of execution Market orders:
• Work best for smaller trades and more liquid stocks
• Are inexpensive for a broker to execute
• Cause traders to lose control over the trade
5.2.3) Need-Trustworthy-Agent Trading Focus
This technique is used to execute large orders, particularly in thinly traded issues
• Traders with such a focus use brokers to skillfully work such orders by placing a best efforts, market-not-held, or participate order
• Such a focus is less useful for
information-motivated traders
• Trader loses control of the trade and does not know whether the broker would act in his/her best
interests
5.2.4) Advertise-to-Draw-Liquidity Trading Focus
This technique is used for IPOs, secondary offerings and
sunshine traders If publicity attracts enough traders,
there may be little or no market impact Such orders
bear the risk of trading in front of the order
5.2.5) Low-Cost-Whatever-the-Liquidity Trading Focus
Limit orders are the chief example of this type of order This type of order:
• Is best suited for passive and value-motivated investors
• Has the advantages of low commissions, low impact and possible elimination of dealer spread
• Could cause traders to end up ‘chasing the market’
• Has execution uncertainty, and if the limit price becomes stale, the order may be executed at an unrevised, undesirable price
5.2.6) Trading Technique Summary
Source: Exhibit 9 Volume 6, Reading 35.
• Algorithmic trading refers to electronic trading subject to quantitative rules and user-specified benchmarks and constraints
• Related, but distinct, trading strategies include using
portfolio trades and smart routing (use of algorithms
to route an order to the most liquid venue)
Trang 95.3.1) The Algorithmic Revolution
The underlying logic behind algorithmic trading is to
break large orders into smaller orders that blend into the
normal trading volume in order to moderate price
impact
• Automated trading requires constant monitoring
to avoid taking unintentional risk (e.g an
unbalanced portfolio)
NOTE:
• Today’s traders have become strategists and
tacticians, whereas in the past, their primary task
was managing broker relationships
• The meat-grinder effect states that in order for a
large equity order to get done, it must often be
broken up into smaller orders
5.3.2) Classification of Algorithmic Execution Systems
Logical Participation
Strategies
Opportunistic Strategies Specialized Strategies
• Simple Logical
Participation
Strategies
• Implementation
Shortfall Strategies
Simple Logical Participation Strategies
This is the most common class of algorithms in use
Following are its types:
• Volume-weighted average price (VWAP) strategy
breaks up an order over time to match or improve
upon the VWAP for the day It can either use
historical volume data or forward-looking volume
predictors
• Time-weighted average price (TWAP) strategy
breaks up the order in proportion to time to match
or beat a time weighted or equal weighted
average price The strategy is useful in thinly
traded assets whose volume patterns might be
erratic and can be reactive or proactive
• Percentage-of-volume strategy is a strategy in
which trading takes place in proportion to overall
market volume until the order is completed
Implementation Shortfall Strategies
These strategies solve for the optimal trading strategy that minimizes trading costs as measured by the implementation shortfall method
Opportunistic Participation Strategies
These strategies also involve trading over time: passive trading combined with the opportunistic seizing of liquidity This liquidity strategy is not a true participation strategy Examples include pegging and discretion strategies (that use reserve or hidden orders and crossing)
Specialized Strategies
These include passive order strategies, hunter strategies (that seek liquidity), market-on-close algorithms, smart routing, and other specialized strategies
5.3.3) The Reasoning behind Logical Participation
Algorithmic Strategies
• Simple logical participation strategies are based
on the premise that breaking up the order into smaller sub-blocks yields a lower average market
or price impact
• Implementation shortfall strategies believe in
minimizing a weighted average of market impact costs and missed trade opportunity costs Since the volatility of trade value or trade cost increases with trading horizon, these strategies are typically
front-loaded (trade heavily early in the trading
day) The implementation shortfall algorithm solves
for an objective function that minimizes expected total cost and variance of possible cost outcomes
This is consistent with the portfolio optimization problem
Important: Generally:
• Orders that are small relative to average daily volume, have low urgency and low spreads are ideal for VWAP algorithms
• Orders that are small but have high urgencies are ideal for implementation shortfall algorithms
• Orders that are large should be traded using a broker or crossing system to mitigate large spreads
6 SERVING THE CLIENT’S INTERESTS
6.1 CFA Institute Trade Management Guidelines
The Guidelines define best execution as:
• “the trading process Firms apply that seeks to
maximize the value of a client’s portfolio within the client’s stated investment objectives and
constraints”
Practice: Example under Exhibit 12 Volume 6, Reading 35
Trang 10The definition identifies four characteristics:
• Best execution cannot be evaluated
independently
• Best execution is a prospective, statistical, and
qualitative concept that cannot be known with
certainty ex ante
• Best execution can be measured on an ex post
basis, even though such measurement on a
trade-by-trade basis may not be meaningful in isolation
• Best execution is a process, not an outcome that is
interwoven into repetitive and continuing
relationships
The Trade Management Guidelines are divided into
three areas:
1 Processes: Firms should establish formal policies and
procedures that have the goal of maximizing asset
value of client portfolios through best execution and
that provide guidance to measure and manage the
quality of trade decisions
2 Disclosures: Firms should disclose to clients and
prospects:
• General information regarding trading techniques,
venues and agents
• Actual or potential trading related conflicts of
interest
3 Recordkeeping: Firms should maintain documentation
that supports:
• Compliance with the firm’s policies and procedures
• Disclosures provided to clients
NOTE:
The records may also support a firm’s broker selection
practices
NOTE: These guidelines are a compilation of
recommended practices and not standards
6.2 The Importance of an Ethical Focus
The code of both buy-side and sell-side traders is that verbal agreements will be honored Over time, the disappearance of commissions has caused costs to become implicit and markets to become more adversarial However, in every case, the ethical focus of the portfolio manager and the buy-side trader must be the interests of the client and all actions should be consistent with the trader’s fiduciary responsibilities
Practice: End of Chapter Practice Problems for Reading 35 & FinQuiz Item-set ID# 13345