MAGNA Securities traders' go the extra length to understand the macro-level investor specific execution desire of each order, whether individual or basket, that comes through our trading desk. Through our technology we strive to achieve the benchmark price for each client as per their given instructions. Pre-trade benchmarks (prices that are known before or at the time trading begins) may include the previous night's closing price, opening price, arrival price (i.e. price at time of order entry) or the decision price (i.e., the price used in the portfolio construction phase). Intra-day benchmarks are comprised of prices that occur during the day such as Daily Volume Waited Average Price (VWAP), Real Time-VWAP (TWAP) or the average of the open, high, low and close. Though rare, the Post benchmark price of future close (an estimate of the expected future closing price) may also be utilized.

Our traders understand further that "Trading too aggressively will lead to higher impact cost but trading too passively will lead to higher risk and may result in even more costly trades." To solve this dilemma we can choose the appropriate algorithm to balance the trade-off between cost and risk based on the investor specified level of risk aversion. For example, for a buy order the strike algorithm will become more aggressive when prices are less than the specified benchmark price ("in the money") and less aggressive when prices are higher than the benchmark ("out of the money").

We are extremely flexible, some of our value or growth portfolio managers may desire execution at their decision price (i.e., the price used in the portfolio construction or rebalancing phase), while mutual fund managers may desire execution at the closing price to coincide with valuation of the fund, though more often than not, many our clients desire an execution that targets VWAP with pre-determined with average daily volume threshold levels.

The Efficient Trading Front (ETF) associated with the VWAP benchmark has a much different shape than any of the pre-trade or post-trade benchmarks and is an increasing function with respect to risk. This is because the intra-day benchmark prices include both temporary and permanent impact cost, and the timing risk calculation is based upon all prices and trades over the entire trading period rather than from a specific point in time. For intraday benchmark prices, traders minimize both cost (i.e., expected gain/loss to the benchmark) and uncertainty of the expected gain/loss (timing risk) by participating with volume.

References
Robert Kissell and Roberto Malamut "Understanding the Profit and Loss Distribution of Trading Algorithms" Spring 2005