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by Vincent Mooijer, Special to the TradeTech Blog
Vincent Mooijer is the Investment Manager and Head of Equities, PGGM, an investment firm that provides income protection for everyone in the healthcare and social work sector. PGGM is a non-profit organisation that enables its members to derive maximum benefit from all its products and services. Mr. Mooijer will be speaking at TradeTech in London on 12-15 April. We’re excited to hear his perspectives below on how to best plan your trades in today’s evolving technology landscape. – Kelly Hushin, Editor, the TradeTech Blog
Plan your trade and trade your plan. Today, this old market wisdom is even more applicable than ever before. Technology, innovations and regulations have changed the equity trading landscape rapidly.
Whereas the main focus of the buy side trader was on “how much can I trade at what price?,” nowadays, for example, selecting the venue to execute the trade has become another aspect to take into account. Pattern recognising algorithms, collocation and high frequency trading are all new challenges in a still-punch drunk market.
The buy side trading desk which merely executes trades according to a pre-set trade pattern (e.g. VWAP or participation) is likely to have unnecessary trading costs. A thorough pre-trade analysis is essential for an optimal execution strategy. Many buy side traders however, only become aware of an order when it hits the trade blotter. The present day buy side trader should therefore be involved much earlier in the investment process.
Knowing the names, size and motivation of the potential orders allows the trader to plan the trade properly. A trade plan should take into account corporate actions, economic releases, price movement, volume patterns, location of liquidity, market participants and trading behaviour. Doing this exercise before the trade is initiated means the buy side trader can also advise on timing of the trade.
Using average trade volumes and close-to-close data is not good enough anymore. In order to find the optimal trading strategy the trader needs to know when a certain volume is available. When do dark pools find the most matches? What is the average spread at any given time? What is the dispersion of the volume and spread during the day, week or month?
Now when the planning is done and the trader has thought of how to respond in different circumstances, it is important to stick to the plan. Obviously the trader needs to act on new information and opportunities in the market. Always ask yourself the question, why do I trade this size, this price, this strategy, this venue? If you cannot answer that question all the time, you are likely to end up with performance slippage. On the other hand, there is also the risk of becoming too systematic. Using data from the past means your trading behavior can become predictable. Using technology in combination with the experience and skill of the buy side trader to interpret the market should lead to a successful trading desk, adding value to the investment decisions of your company.
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