Questions 49 to 54 relate to Portfolio Execution
Wiscon Alliance Case Scenario
Wiscon Alliance (WA) is a broker/dealer firm operating in the US. In an effort to
maximize the value of clients’ portfolios, WA would like to ensure its traders comply
with the CFA Institute’s Trade Management Guidelines. Paul Mathews, CFA, is WA’s
chief compliance officer who has been tasked with drafting a suitable policy which will
be consistent with The Guidelines. Mathews begins his assignment by drafting a policy
which will address the areas – employee compliance, disclosures, and best execution. The
officer then proceeds to define three characteristics underlying best execution which he
intends to include in a report introducing the new policy.
Characteristic 1: “Best execution must be judged on a trade-by-trade basis due to the
variable nature of trades.”
Characteristic 2: “Best execution is trade-specific and consequently must be jointly
determined by buyer and seller on an ex-post basis.”
Characteristic 3: “Best execution is an outcome of a repetitive process.”
Simon Bale is a senior trader at WA. Bale is evaluating the trades undertaken by WA’s
traders during the current week. The first trade being examined is a sell order for 500,000
shares of the Gratex Corp stock. The order was executed in an order driven market with a
specified limit price of $55.00 (or better). The trader’s primary concern was to minimize
the price impact of the trade and he thus elected to display 30% of the order size at any
one time. The trade was executed at a time when the best offer was $53.80.
Next, Bale examines an order to buy 800,000 shares of Lestley Inc’s shares of a stock.
The order was submitted to an electronic crossing network. The crossing of the trade took
place at 11 am on the same day when market bid and ask prices were $28.10 and $28.30,
respectively. The trader received a partial fill of 200,000 shares and is seeking a market
which will ensure the remaining order is completed. The average trading size of the
Lestly Inc stock is 200,000 shares.
Bale concludes his analysis by examining an order to buy 125,000 shares of ABC
Manufacturing’s common stock a price of $52.00 (or better). The order was placed on
Monday and 30,000 shares were purchased at a price of $51.80 each when the market ask
was $51.00. The VWAP for the day was $51.50. The commissions paid on the trade were
$12,000.
Lark Holmes is a senior trader at WA. Upon Bales’ request, Holmes reviews Bale’s
analysis of the ABC Manufacturing trade. After reviewing his analysis, Holmes
concludes that there are certain limitations in using VWAP as a price benchmark.
Limitation 1: “The magnitude of a trade’s volume tends to bias the VWAP measure.”
Limitation 2: “Brokers with discretion in the timing of their trades can delay buy orders
received if the stock’s price exceeds VWAP at the close of a particular
trading day.”
49. With respect to the areas addressed by Mathews’ policy, which of the following is
most consistent with the Trade Management Guidelines?
A. Disclosures
B. Compliance
C. Best execution
50. With respect to the characteristics of best execution identified by Mathews, which
is most consistent with the Trade Management Guidelines? Characteristic:
A. 1
B. 2
C. 3
51. The trade order for the Gratex Corp stock is most likely classified as:
A. reserve order.
B. participate order.
C. best efforts order.
52. Which of the following features of electronic crossing networks most likely serves
as a motivating force behind the desire to change the trading venue for the Lestley
Inc stock?
A. Cost of trade
B. Price discovery
C. Market impact of trades
53. The implicit cost of the ABC Manufacturing trade using VWAP as the price
benchmark is:
A. $9,000.
B. $15,000.
C. $21,000.
54. Considering the limitations identified by Holmes, which of the following
addresses the fact that the VWAP measure can be gamed?
A. Limitation 1 only.
B. Limitation 2 only.
C. Both of the limitations.
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