Though trading aggressively can be relatively expensive, aggressive trading on buy orders is often justified if the stock has positive momentum, according to a study released on Wednesday by Credit Suisse.
The study looked at alpha generated in the five days after a trade as well as at the added costs of executing an order aggressively. It found that buy orders tend to have fast decaying alpha. Given that, traders frequently need to be more aggressive in order to capture returns over a five-day period, the study found.
Examining the entire profile of trades out to T+5, Credit Suisse determined that the extra alpha captured by aggressive trading can more than offset the incremental costs associated with quick trades.
“Traders may tend to think, ‘I don’t influence T+5,’” said Ana Avramovic, an analyst at Credit Suisse. “But everybody is on the same side of the game here, trying to affect the bottom line.”
Traders should speak with their portfolio managers and understand what the potential for alpha decay might be. Those conversations can influence traders’ decisions so they are able to time their trades appropriately, Avramovic said.
Conversely, it might behoove PMs to better understand the costs of aggressive trades. While trade size is the most important factor in influencing impact cost, Avramovic noted PMs should be aware of other influences as well, including time of day, volatility, liquidity and spread.
Aggressive trading might be good for certain buy orders, but sell orders are a different story. When Credit Suisse looked at data from its long-only customers over the past three years, it found clients were better at identifying outperformers than at knowing when to close out trades.
“That may be a reflection of the behavioral bias that we’ve heard so much about where humans tend to hold on to losers longer than they should,” Avramovic said. “People may not be selling when they should, and instead selling when they have to, which may not be the optimal time.”
The report suggests that buys should be worked more aggressively than sells. More importantly, it recommends that traders, not just portfolio managers, look to find ways to better capture alpha.
“It comes down to having a dialogue with the PMs about what types of alpha they are targeting,” Avramovic said. “Based on that, does it make sense to be more aggressive or less?”
