Portfolio Trading Strategies Essay Example for Free

Portfolio Trading Strategies Essay acquire in equity are a function of time and be. Trading strategies are essentially center on maximizing profits through represent maximization which in turn is linked with performance costs. then cost of trade in excessively a consideration for determining trading strategy. doing costs are said to include commissions, act and fortune costs. (Collins. Fabozzi 1991).Commissions are most easy to destine as these are fixed and relate to the fees paid for trading. However there is a problem of touchstone executing and opportunity costs as these are neither fixed nor can be considerably measured. While a number of approaches have been developed for beat opportunity and trading costs, a method acting to suit all circumstances has not been evolved so far. The complexities involved and since minor differentials make major edition in profits an effective strategy to constantly provide yield is challenging.Investment strategies thus s et out to rationalize trading to provide benefits from execution as well as opportunity costs. Since there is no uniform strategy that can assure trading profits it is very difficult to balance the declamatory number of factors which affect swops. Timing in fact is a constant which affects both opportunity and execution costs. Opportunity Costs and execution costs are both a variable component of act costs. Thus profits in transaction are determined by opportunity and execution costs and the balance that will be maintained mingled with these.Opportunity costs are the performance dearth that arises from a failure to execute the desired trade at the desired time. These indicate the difference between actual investment and the performance of a desired investment. This is adjusted for fixed and execution costs. Thus opportunity cost is incurred for not being able to implement the desired trade. Since opportunity costs are befuddled investment opportunities, these could in some res pects be called hypothetical costs and thus are difficult to calculate. (Collins. Fabozzi 1991)Execution costs arise out of the demand for immediate execution and are said to shine the demand for liquidity and the trading activity at the time and date of conducting trade. (Collins. Fabozzi 1991). These vary with the investment path and trading demands of the investor. Both tuition motivated traders and information less traders could use strategies to benefit from execution costs.The information motivated trader acts in the belief that he has superior information to that available to the average dealer. Thus he executes the trade using this information for making profits. This style of trading has a large wrong impact. On the other hand the information less trader allocates wealth based on a scathe which has been factored in the trade. These have a lesser impact than information motivated traders. The problem measuring execution costs occurs as the difference in the price of th e costs in absence of a trade is not observable. (Collins. Fabozzi 1991)Execution costs are determined by foodstuff impact and market timing costs. Market impact costs are the bid/ask spread and a price concession that compensates the buyer or seller for the risk that the investors transaction is information motivated. The Market timing costs arise due to the fact that at the time of execution of the trade the assets price moves for reasons which are not related to the transaction. Market impact measurement is dependent on the pre trade measures, the post trade measures and also average measures which can be undertaken throughout the day. These approaches aim to define the good value of the trade at a particular time. It is this that determines execution costs.Market making strategy thus attempts to balance opportunity and execution costs. Patient trading strategies may result in high execution costs while aggressive trading strategies could impact the other way. (Collins. Fabozzi 1991). On the other hand the cost management methodology is designed to capture maximum elements of the transaction process. (Collins. Fabozzi 1991). Execution costs are also shown to be higher in an automated trading process in Paris relative to the parvenu York Stock Exchange with bedight based trading with human intervention.The lower execution in grade based system suggests that there is benefit in human intervention in the trading process. This is feasible as the NYSE specialist is able to maintain narrow spreads, can anticipate future lodge imbalances and also helps reduce the volatility of transitory movements in share prices. Thus as specialist and floor traders use the human intellect to make time preferred trades, execution costs in manual(a) trading are considerably lower than those in automated trading. This is also supported by the purpose played by market makers in forming prices and providing liquidity in the securities market as per example gleaned from the t rading behavior of market makers on the New York Stock Exchange. (Madhavan. Smidt 1993).ReferenceMadhavan, Ananth. Smidt, Seymour. (1993). An Analysis of Changes in Specialist Inventories and Quotations, journal of Finance, Vol 48, 19932. Venkataraman, Kumar. Automated Versus Floor Trading An Analysis of Execution Costs on the Paris and New York Exchanges, journal of Finance, Vol 56, No. 43. Collins, Bruce M. Fabozzi, Frank. (1991). A Methodology for Measuring Transaction Costs, Financial Analysts Journal, March/April 1991. favored language style English(U.K.)