I am not sure if it is accurate, but I personally feel that impact cost even if our trade value is in low six figures is really significiant in nse cash market. So how does large equity only traders manage their positions. I know we can trade in FnO. But I am looking for perspective of individual equity traders who buy and sell shares worth 1 lakhs and above regularly. How do you minimize impact cost ? What are techniques used to avoid influence of your order on market price?
I do low six figures regularly… But I don’t see much spread. NSE cash is very deep. I do not do small caps though…
When you want to trade huge amounts you look for stocks with really high volume. Higher the liquidity, lower the impact of big orders. But sometimes let’s say you wanna trade a small company then you use some strategies like scale ins, scale outs to keep the average from going up.
There are many other strategies but that’s one of the most common. A fun fact, most of the traders job in investment banks is basically executing the order for their clients. If you have $1B order to buy let’s say millions of shares of RELIANCE then that increases the complexity to keep it from impacting the market.
So these investment banks have created proprietary algorithms that execute their clients orders in the least impactful way possible on the market. The jobs of the traders in those companies is to manage their algos and check if they are working as intended. So that’s how it currently works. It sometimes takes month to reach the required trade size. Hope this helps!
Thanks for the detailed info.
For those who want a little bit detailed explanations check latest episode of chat with traders eith Hayden Beamish from 46 minutes. There is lot of discusiion about execution algorithms.