BERKELEY, Calif. - BARRA Inc. has released the first commercially available software model that predicts equity transaction costs before trading occurs.
Market Impact Model forecasts the direct and indirect costs of trades based on user-specified size and direction of trade. It also offers parallel trading in multiple accounts and estimates trader skill. Managers can determine accurately which trades to execute for after-cost out performance.
Trading costs are "an area of great interest now that market volatility has increased. As volatility increases and spreads narrow, money managers are going to have even more difficulty beating market indexes. Market Impact Model will help quantify what has been seat-of-the-pants estimates on trading impacts," said Paul Green, strategic marketing manager at BARRA, Berkeley, Calif.
Market Impact Model allows users to estimate transaction costs by providing both asset-level and portfolio-level analysis of liquidity. The model's graphs and charts identify market impact costs which increase non-linearly with trade size. Then, other BARRA portfolio construction tools can optimally balance risk, returns expectations and transaction costs.
"Investors judge performance based on realized returns, after transactions costs. Managers need accurate cost estimates to outperform," said Ronald Kahn, vice president and director of research for BARRA.
As users, BARRA is targeting mutual funds, hedge funds and other large money managers. No cost estimate was available. It will be sold on an annual subscription basis. Officials plan to release an Internet-based version of Market Impact Model before the end of the year. For more information, contact Mr. Kahn at BARRA at (510) 548-5442.
BondEdge models money markets
LOS ANGELES - Capital Management Sciences Inc. has added a system for modeling money market instruments in its fixed-income portfolio management tool, BondEdge.
Teri Geske, director of product development for Los Angeles-based CMS, said the new model recognizes 30 kinds of money market instruments, each with unique characteristics, allowing comprehensive modeling of both fixed-rate and variable-rate money market instruments.
Edward J. O'Brien, senior vice president, asset/liability and risk management at State Street's Global Securities Lending Group, Boston, was a beta tester for the new product.
"This system is quite a power house," said Mr. O'Brien. "We are very impressed with what we see. There is no question it will be very useful to those managing short-term money market securities, as well as longer-term bonds."
The new money market model offers precise calculations for each type of short-term instrument, said Ms. Geske. She said the model can be used to create repurchase agreements with the capability to specify the underlying collateral for these instruments.
The new model also is useful for commercial paper, certificates of deposit, bankers' acceptances and tax-exempt instruments such as BANs, TANs and RANs.
Board plans new financial tools
BOSTON - Andrew W. Lo, Harris & Harris Group professor and director for financial engineering at the Massachusetts Institute's Sloan School of Management, has been named chairman of a scientific advisory board to assist Investment Technology Group, Boston, in planning the next generation of investment tools and trading technology.
The board's primary mission is to identify promising emerging financial technologies and develop practical implications for portfolio management and trading.