Handbook of Finance: Investment Management and Financial Management

Chapter 12. Implementing Investment Strategies: The Art and Science of Investing

WAYNEH.WAGNER

Senior Advisor, ITG Inc., Principal OM/NI, A Trading Consultancy

MARK EDWARDS

Vice President, ITG Solutions Network, Inc.

Abstract: Driven by the two irresistible forces of regulatory climate change and technological innovation, worldwide trading and the markets have undergone a startlingly rapid process of change and innovation. The most important changes are (1) how execution cost analysis has been embraced by most managers as a performance-enhancing activity; (2) how control of the trading order has passed from the brokerage/exchange community to the buy-side trade desk; (3) how the internal process of executing managers' orders has changed; and (4) how costs have come down significantly, to the great benefit of investors.

Keywords: trading, exchanges, implementation, trade motives, liquidity, total quality management (TQM), trading costs, impact, opportunity cost, best execution, CFA Institute Trade Management Guidelines

"Success in investment management comes from picking good stocks. The rest is just plumbing." This quote from a well-regarded, but mercifully anonymous, money manager highlights one of the key reasons that active managers have failed to keep up with index funds over the past 10 years. Picking stocks is the active manager's Holy Grail, and the bulk of a manager's efforts and expenses goes to enhance their forecasting ability. To their credit, Plexus research suggests that ...