The pricing of risk for large blocks of stock can be very much an arbitrary process, with Portfolio and Risk Managers applying their own techniques and models to establish what they deem the fair transaction price is for a block of shares.
Typical starting points can include; indentifying what percentage of the historic ADV the block is, use of generic historical return screens to provide percentage discount estimates and analysing recent performance or price levels. Whilst informative, such basic inputs may not always provide the whole picture.
Before a level can be truly established a multitude of current market variables need to be analysed and understood as to their potential influence on the final price . Within the OTAS suite, two components bring together a complete range of pricing and factor analysis providing money managers with tools to effectively do this.
Price Formation –
The Schedule provides an optimised estimate(‘Utility’) establishing an indicative cost framework from which an initial risk priced can be derived. It considers the total size of the block and then models the total expected trading costs* of executing in the market based on our proprietary impact and risk forecasts. The live Microstructure charts can also be referenced to analyse the current market characteristics of the stock to further assist in establishing a price level.
Applying Risk Factors –
Core Summary for single stocks lets you independently evaluate the current state of a company by analysing a complete range of market factors whilst highlighting extremes and outliers across the data set. Based on the evidence, users can evaluate their potential effect on pricing and how/if this should translate in terms of discounting from the Utility.
- Performance benchmarking including current chart technicals and compare with trading volume analytics.
- Evaluation of fundamental factors such as recent earnings momentum, relative valuation extremes, dividend expectations and growth assumptions.
- Gauge current internal/external company sentiment via insider transactions, news intensity or unusual behaviour in the derivative and credit markets.
- Establish the extent of event pre-positioning and demand from short covering via Alpha Capture trade ideas monitor and Short Interest indicators.
- Monitoring upcoming event risk.