Portfolio Trading Strategies Essay Example for Free

Portfolio work Strategies EssayProfits in equity ar a function of timing and tolls. Trading strategies are essentially foc usaged on maximizing profit through cost maximization which in turn is linked with transaction cost. Thus cost of trading in also a consideration for determining trading strategy. Transaction cost are said to include commissions, transaction and chance costs. (Collins. Fabozzi 1991).Commissions are most easy to define as these are fixed and relate to the fees paid for trading. However there is a problem of measuring writ of execution and hazard costs as these are neither fixed nor can be easily measured. While a number of approaches have been developed for measuring opportunity and trading costs, a method to suit all circumstances has not been evolved thus far. The complexities involved and since minor differentials make major variation in profits an effective strategy to constantly provide yield is difficult.Investment strategies thus attempt to ra tionalize 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 large number of factors which sham heaps. Timing in fact is a constant which affects both opportunity and execution costs. Opportunity Costs and execution costs are both a variable component of transaction costs. Thus profits in transaction are determined by opportunity and execution costs and the balance that bequeath be maintained between these.Opportunity costs are the performance shortfall that arises from a failure to execute the desired mess 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 missed investment opportunities, these could in some respects be called hypothetical costs and thus are difficult to calculate. (Collins. Fabozzi 1991) act costs arise out of the demand for immediate execution and are said to reflect the demand for liquidity and the trading activity at the time and date of conducting trade. (Collins. Fabozzi 1991). These vary with the investment style and trading demands of the investor. Both information 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 price impact. On the other hand the information less trader allocates wealthiness based on a price 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 the costs in a bsence of a trade is not observable. (Collins. Fabozzi 1991)Execution costs are determined by market impact and market timing costs. securities industry impact costs are the bid/ask spread and a price concession that compensates the purchaser 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 fair 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 spot aggressive trading strategies could impact the other way. (Collins. Faboz zi 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 New York Stock mass meeting with floor based trading with human interpolation.The lower execution in floor based system suggests that there is benefit in human intervention in the trading process. This is possible as the NYSE specialist is able to maintain narrow spreads, can anticipate future order imbalances and also helps undertake 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 trading are considerably lower than those in automated trading. This is also supported by the role played by market makers in forming prices and providing liquidity in the securities market as per example gleaned from the trading behavior of market makers on the New York Stock Exchange. (Madhavan. Smidt 1993).ReferenceMadhavan, Ananth. Smidt, Seymour. (1993). An synopsis 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.Preferred language style English(U.K.)