The concepts of trading costs and market impact often get overlooked in the grand scheme of investing. As this extremely informative book points out, though, this can be a costly omission. “Optimal Trading Strategies” (pub. Amacom, 2003) by Robert Kissell and Morton Glantz is not exactly light reading. In fact, many pages are filled with imposing mathematical formulas and derivations. Such explicitness is needed to fully cover this often complicated subject matter though. Trading costs are an overlooked factor in investment management, so it is worth the effort to wade through the math to get to the underlying principles at hand. The subtitle of the book, “Quantitative Approaches for Managing Market Impact and Trading Risk”, should prepare the reader for the high-level math in the text.
“Optimal Trading Strategies” addresses several fundamental problems involved during the analysis of market impact and trading costs. One of which is known as the "Traders dilemma". Simply put; trading too aggressively increases costs, while trading too passively increases exposure to risk. We are understand this concept at an intuitive level, but the authors manage to clearly and effectively quantify the dilemma enabling an investor to properly weigh the tradeoff and make the appropriate trading decisions.
Kissell and Glantz also include a practical discussion of why traders select the popular Volume Weighted Price Strategy for trade allocations. (VWAP). It is accompanied by the most complete mathematical and quantitative analysis of VWAP I have encountered. Numerous examples with the appropriate “solutions” are included for practitioners to hone their skills before applying the concept in real-time.
The intended audience for this book is the people on the trading desks of mutual funds and hedge funds who execute large-size orders for a living. This book is NOT for small day traders, or the casual investor who may trade frequently in his retirement account. The technical treatment of the subject matter combined with examples from institutional trading render this text appropriate for a certain group of investors who realize that performance can be enhanced by pay close attention to market impact and costs of trading.
In summary, Kissell and Glantz brilliantly fill a significant gap in the literature and its applications in real-life trading. “Optimal Trading Strategies” provides an accessible introduction to the science of trading, and a thorough quantitative handling for those looking for the highest level of detail.