Over the weekend Santa stopped off in Qatar to watch the World Cup quarter finals (even though it was really a business trip, it was also a good excuse for a jolly).
Like the rest of us, he was drawn into the drama as penalties proved to be critical in three out of four matches.
During the last year, it is not the only place where we have seen penalties imposed. With volatile and unpredictable markets, investment managers have been forced to have challenging discussions with investors about portfolio liquidity, particularly when facing a proposed liquidation. At times, if a liquidation event creates permanent market impact on a residual portfolio, then a penalty can be applied in the form of a dilution levy to compensate the other fund holders.
Our team has created tools to support these discussions by combining market impact modelling with a reliable history of liquidity and spreads to create a Portfolio Liquidation Horizon.
Chart one allows the user to see the market impact by security plotted against the expected duration of the trade given a choice of participation rates.
Chart two breaks this down further by trade category, comparing the trading horizon against the value for each category, thereby creating the ability to identify where the exposure might be for different instruments.
Pre-trade analysis relies upon reliable market impact models, but first, well maintained normalised data sets are needed.
Like a penalty shoot out, practice and thorough preparation will improve performance over time particularly when considering different scenarios. The tools we have built take pre-trade analysis even further to facilitate stress testing different background situations and layering on dilution threshold calculations to support discussions for liquidations.
As we have seen in this World Cup, sometimes the biggest surprises come from the most unexpected areas. Global coverage and awareness has never been more relevant when preparing for engagement.
All the content here has been generated by big xyt’s Liquidity Cockpit dashboards or API.
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