Thread by @KAnantrao

Careful Discretion: Challenges of a trader in Private Sector Insurance company in India.

Since 1997-98, Insurance sector was opened up for private players in India who have grown steadily over past 2 decades to become a force to reckon today.
So how does a trader execute trades?

Assumptions
1) The Private insurance is mid level player in the sector, ranked between 5-8 position among 20 players.
2) The story is set in the period between 2011-2014.
3) Big Funds used FIX and/or 1 Touch DMA for execution whereas medium funds used Manual/FIX for execution

4) There are total 60 brokers empanelled with Private Insurance Company.
5) 20 / 60 brokers empanelled are Foreign Institutional Brokers to whom this trade can't be disclosed as they are selling the same for FII's.
6) Stock cant be sold on Block/Bulk route for disclosure reasons.

7) Business to 10 / 60 brokers empanelled has already reached 4-4.5% of the total brokerage commission against the max permissible limit of 5% which is computed on a quarterly / half yearly basis.
8) The stock to be sold is trading at 300 & total quantity to be sold is 90L shares

9) Now the Trader at Insurance company has to distribute 90L shares among 30 brokers ensuring the price damage is minimal yet the entire quantity is offloaded same day.
10) Out of remaining 30 brokers, 10 brokers have good execution capability but have issues with trade secrecy.

11) 10 brokers have average execution but are good with client trade secrecy.
12) 10 brokers are decent on both execution & trade secrecy.
So how will the trader now distribute 90L shares among 30 brokers in a manner which helps him dispose the full quantity yet get the best VWAP

Henceforth Trader will be addressed as T & Brokers will be labelled B1 to B30 & those brokers who are empanelled but can't be given the trade due to various reasons will be labelled A1 to A30.
Trader will be using both manual & FIX to execute the trade. #investing #trading

Time: 9AM
Trader T receives instructions from Investment Manager IM to sell 90L shares of a Nifty stock which is trading at 300/share.
Time: 9:15AM
Markets open & Stock price is 302
Time: 9:30AM
T instructs to B1-B5 to sell 3L shares each with "CDWOL" till 11:30

CD Order: CD stands for Careful Discretion.
CD orders come in two variations
1) CD order with Limit Price / time limit. Cant sell below the limit price and/or after the time limit is exhausted.
2) CD Order without limit Price . Can't sell after the time limit given is over.

Time: 9:30AM
T instructs to B6-B10 to sell 3L shares each with "CDWL" till 15:30. Limit price is 300/share
Time: 9:45AM
T instructs to B11-B20 to sell 50K shares each with "LOVP" till 15:30. Limit price is 305/share and volume participation % is 30%.

CD Order: CD stands for Careful Discretion.
How does it work. Assume a broker has to sell 3L shares CD in 2 hrs,means 2500 shares each min or 1250 shares every 30 seconds to be sold. Brokers feeds the instructions in his terminal with the mandate set for 1min or 30 sec orders.

CD Order: CD stands for Careful Discretion.
Splitting orders are known as "Slices". In CDWOL (CD without Limit) order,system keeps hitting slices at the pre designed intervals of either 1 min or 30 secs.
In CDWL order, system will pile up pending orders if price goes below limit.

Time: 10AM Stock Price: 303
T has given instructions to sell 35L shares to 20 Brokers & is being updated by all of them at every 15 mins & he can watch it live on his FIX OMS as well.
LOVP : Limit order with Volume Participation
In this order, T instructs broker the following

He gives a limit price say 303 to sell but volume participation should be only 25% of incremental volume. So if stock trades say 50K shares above 303 then the broker should sell 12.5K shares i.e. 25% of 50K in that incremental volume & not more.

Time: 10:15 AM Stk Price:302.65
T starts interacting with A1-A30 for market intelligence asking about order flows on different stocks etc to ascertain who is buying/selling the stock where he is selling.
Then he tells some brokers in A1-A30 to show offers in Stock he is selling.

One may be surprised why T is asking for sellers when he himself is selling? This strategy serves two purposes,
1) It helps gather info about the price/qty/sellers
2) It throws the dog off the scent.
At 10:45, A10 tells him he has a seller who can sell 20L shares at 303.

T asks A10 to keep the order firm for 10 mins and then releases him apologising that the IM is in a meeting so he cant decide without the IM's permission.
During those 15 mins. he marginally modifies the limits given to brokers B1-B10 with CD orders to maximise volume.

Time: 11:00 AM Stock Price: 303.85
T sends instructions to sell 20K shares each to B21-B30 with limit of 302. Since price is above 303, all the orders are executed swiftly & confirmations are received.
Time: 11:15AM Stock Price: 303.45
News flash on earnings estimate on stock

Time: 11:30 AM Stock Price: 304.15
Time for Recap
B1-B5: Sold 15L shares @ 303.45
B6-B10: Sold 5L Shares @ 303.65
B11-B20: Sold Zero as price never went above 305
B21-B30: Sold 2L shares @ 303.15
Total: 22L Sold till 11:30AM
Time for new instructions to same set of brokers now

Time: 11:45 AM Stock Price: 304.30
T instructs B1-B5 to sell 3L shares each LOVP with 30% between 302-305 and above 305 increase volume participation to 50%. till 15:30.
T instructs B6-B10 to complete the sale of pending shares CDWL order by 13:45 at 302.5 or better.

T modifies the instructions to B11-B20. Its now a CDWL instead of LOVP to be completed by 13:45 with limit of 303.50
T instructs B21-B30 to sell 50K shares each LOVP at 304 or better with 30% volume limit till 13:45.
Time: 12:30 CMP: 305.15
Earnings expectations are great.

Time: 12:40 CMP: 305.00
A15 informs T that he has a buyer in who is looking to buy 25L at market price but not above 306. T notes it and asks A15 to stand by for 10 mins.
T now shoots incremental order of 2L shares each to B11-B20 with a limit of 304.75 or better.

He informs A15 to carry on with his other clients buy order but requests him to participate aggressively, subtly hinting him of supply.
Time: 13:00 CMP: 305.10
B11-B20 have completed the incremental 2L shares & are back to completing the older order.

Time: 13:45 CMP: 305.65
Time for Recap for the day
B1-B5: Sold 25L shares @ 303.55
B6-B10: Sold 15L Shares @ 303.75
B11-B20: Sold 25L shares @ 304.85
B21-B30: Sold 5L shares @ 303.90
Total: 70L Sold till 13:45
Time for new instructions to same set of brokers now

T updates IM about the qty and price and asks whether any change is needed. IM instructs T to complete the order by 15:00 hours as today happens to be derivative expiry and some FII selling is expected in the VWAP period from 15:00-15:30 today. The same is confirmed by A1-A30.

Time: 13:50 CMP: 305.35
T asks B1-B30 to stop all the pending orders & standby.
Time: 14:00 CMP: 305.15
T instructs B21-B30 to sell 50K shares CDWOL till 15:00 Hrs
T instructs B11-B20 to sell 30K shares @ market.
T instructs B1-B10 to sell 120K shares LOVP>75% incremental volume

Time: 15:00 CMP: 304.95
Time for Recap for the day
B1-B5: Sold 31L shares @ 303.95
B6-B10: Sold 21L Shares @ 304.25
B11-B20: Sold 28L shares @ 305.05
B21-B30: Sold 10L shares @ 304.15
Total: 90L Sold.. Order completed

VWAP period starts and stock witnesses a heavy selling as anticipated and CMP falls to 300.60 only to recover and close at 302.30 on day close.
IM after close will cross reference between market closing prices versus VWAP of T.
Today thankfully the VWAP is > CMP so T is saved.

This is an example of just 1 stock and usually there 200 stocks in different weight age across different schemes managed by 2-3 traders i.e. 1 senior / 2 junior in the same manner as mentioned above. Even if the IM's decide to churn their portfolio, it can be a nightmare for T.

I have been fortunate to have executed trades across different institutional traders over the years & my single biggest learning is,
DONT MESS A TRADE
T has tough life trying to please his IM & get the best of brokers sometimes its like managing Mother & wife.

In this role, margin for error is zero. Be it a 10K share order of 1CR share order, be it be a buy or sell, traders have to get the best rates for their masters. Period.
Sometimes people do behave robotic but after market they return to normal.

Hope you liked the story. RT with comment to help me reach to a larger audience. Being a Professional Trader in an Institutional #investor is not easy at all.

Thanks 🙏🙏🙏🙏