What are these?
It is a bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. Convertibles are sometimes called "CVs". At their most basic, convertibles provide a sort of security blanket for investors wishing to participate in the growth of a particular company they’re unsure of. By investing in converts you are limiting your downside risk at the expense of limiting your upside potential.
As the name implies, convertible bonds, or converts, give the holder the option to exchange the bond for a predetermined number of shares in the issuing company. When first issued, they act just like regular corporate bonds, albeit with a slightly lower interest rate. Because convertibles can be changed into stock and thus benefit from a rise in the price of the underlying stock, companies offer lower yields on convertibles. If the stock performs poorly there is no conversion and an investor is stuck with the bond’s sub-par return (below what a non-convertible corporate bond would get). As always, there is a tradeoff between risk and return.
Algorithmic Trading is a concept in trading system that utilizes very advanced mathematical models for making transaction decisions in the financial markets. The strict rules built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price.They are computer based programmes that allow a client to buy or sell a stock. The algorithmic trading programmes try to minimize the market impact of trading. Trading algorithms automatically break up large orders into smaller sizes and the new smaller trading quantities are then fed directly into the market. The beauty of algorithms lies with their flexibility as they can be adapted to execute almost any strategy. Some algorithms tend to simply capture the average price over a day whilst others try to be more edgy for example by trading more heavily during the opening and closing times in the market when the volumes are high and less perhaps when the market slows down during lunch time. Additionally, algorithms can also be customized, for example, to sell stock “secretly” over several weeks if a manager holds for example a 3% position in a particular stock and wants to reduce it to 1%. Overall not only is algorithmic trading more secure than using a human broker but it also costs less than a penny a share to trade electronically versus 6 cents for full service trades. The players in the market – Some of the main brokers offering algorithmic trading are CSFB, Goldman Sachs and Morgan Stanley, Merrill Lynch, Citigroup, JPMorgan and HSBC.
Some of the common algorithms/strategies currently available
Volume Weighted Average Price (VWAP) - a common algorithm trading benchmark which is calculated by adding up the dollars traded for every transaction
(price multiplied by shares traded) and then dividing by the total shares traded for the day. VWAP is simple to use and thus remains a popular benchmark
to measure the performance and to compute trading costs.
Time Weighted Average Price (TWAP) – is calculated by dividing the sum of all trade prices by the number of total trades. The TWAP aims to evenly distribute
an order over user specified duration dynamically balancing adverse selection and market impact in real time. Typically utilised for liquid tickers, generating
many small and frequent orders.
Target Volume (TVOL) - The TVOL determines completion time of the order and price based on market “ticks” or volume. This strategy provides excellent support
for busy trading desks by effectively working orders in line with market volume and frees up the trading time to focus on the big picture.
Market on open (MOO) - means a computation used to calculate an opening price for each security at the beginning of the day.
Market on close (MOC) - means a computation used to calculate the closing price for each security at the end of the day.
Interest in Algorithmic Trading
Delights of Hedge Funds, Institutional Investors, Mutual Funds
- Competitive Advantage- Capitalize on opportunities before competitors.
- Leverage Trader’s Skills – Reduces Manual Work and help trading groups scale there own capabilities.
- Cost Advantages.
Slightly different value proposition, brokerage houses who are selling capabilities to the buy side are keen on offering additional features designed to attract and retain
- Increase Trading Volume
- Attract and retain customers.
- VWAP- Explained Below.
- Arrival Price- The strategy objective is to minimize the execution shortfall relative to quote midpoint [AP+BP]/2 when the order starts. Arrival Price strategy allows the user to select a desired level of urgency (low, med, high, get done) relative to their desired market impact tolerance.
- Close – Minimize the execution shortfall relative to the closing price, subject to a user specified level of market risk (urgency). [Urgency-Low, Medium, High].
- TPOV – Target Percentage of Volume explained below.
Benchmark Execution Strategies
Smart Order Routing [SORT] –
Represents heuristic (i.e. rule based) strategies that automate routine aspects of the trade execution. Although there are no financial engineering concepts behind the methodology, SORT imposes intelligent constraints for the regulatory environment.
- ASAP [Short-Sell As Soon As Possible] - Submit the order at the prevailing short-sell price and dynamically peg the price relative to market movements. Strategy will hit bids if bid price greater than short-sell price, and will lower offer if market moves downward.
- Pegged Order Type [PEGGED] - Submit the order at the prevailing bid (buyer) or offer (seller) price and dynamically peg the price relative to market movements.
- Time Weighted [TWAP] - Submit the order in regular intervals of the specified time horizon at given frequency.
A correction is a short-term reduction in stock market price or activity. A correction counteracts steep rises and brings overpriced stocks back down to fair value. If markets rise as a whole and fall dramatically, this called a "correction within an upward trend".
Corrections are short-term reductions in prices. Therefore, corrections occasionally, but not always, precede bear markets.
- An example of a correction preceding a bear market was the stock market performance during the 3rd quarter of 2001. Dismal job, labor, and retail numbers pushed the stock market into a correction and later a bear market by September 2001.
- The stock market downturn of 2002 pushed the Dow and Nasdaq from their seemingly average levels of 10,000 and 2,000 in March, respectively, to five- and six-year lows of 7,200 and 1,100 by that October.
- The Black Monday crash of 1987, did not push the markets into a bear market. It was just a correction within a upward trend. Additionally, it was a lengthy correction.
A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc.
A stock is traded over-the-counter usually because the company is small and unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by brokers/dealers who negotiate directly with one another over computer networks and by phone. The Nasdaq, however, is also considered to be an OTC market, with the tier 1 being represented by companies such as Microsoft, Dell and Intel. Be very wary of some OTC stocks, however; the OTCBB (Bulletin Board) stocks are either penny stocks or hold bad credit records.
Instruments such as bonds do not trade on a formal exchange and are thus considered over-the-counter securities. Most debt instruments are traded by investment banks making markets for specific issues. If someone wants to buy or sell a bond, they call the bank that makes the market in that bond and asks for quotes. Many derivative instruments such as forwards, swaps and most exotic derivatives are also traded OTC.
A stock that sells for less than $1 a share but may also rise to as much as $10/share as a result of heavy promotion. All penny stocks are traded OTC or on the pink sheets. There are many risks attached to Penny stocks like Low Visibility and Low Tradability. SEC has specific rules while trading in Penny stocks. They are
Before a broker-dealer may effect a solicited transaction in a penny stock for or with the account of a customer it must:
(1) provide the customer with a risk disclosure document, and receive a manually signed and dated written acknowledgement of receipt of that document from the customer;
(2) approve the customer's account for transactions in penny stocks; and
(3) receive the customer's written agreement to the transaction.
In addition, Exchange Act Rules (called as the 15Gs ) require a broker-dealer to give each penny stock customer:
- information on market quotations and, where appropriate, offer and bid prices;
- the aggregate amount of any compensation received by the broker-dealer in connection with such transaction;
- the aggregate amount of cash compensation that any associated person of the broker-dealer, who is a natural person and who has communicated with the customer concerning the transaction at or prior to the customer's transaction order, other than a person whose function is solely clerical or ministerial, has received or will receive from any source in connection with the transaction; and
- monthly account statements showing the market value of each penny stock held in the customer's account.
NOTICE: If received in error, please destroy and notify sender. Sender does not waive confidentiality or privilege, and use is prohibited.