The Fund Industry: How Your Money is Managed, 2nd Edition

CHAPTER 9

Implementing Portfolio Decisions: Trading

For mutual funds, buying and selling investments, or trading, is a critical final step in an integrated investment process that starts with research and carries through to portfolio construction. Here, we discuss how portfolio manager decisions are implemented through trading. Our focus is trading in stocks, although at the end of the chapter we outline how fixed income trading compares to stock trading.

Executing buy and sell orders is the job of the trader. Most larger investment managers have a trading division, or desk, separate from the portfolio management function. (At smaller advisers, portfolio managers may handle their own trading.) This division of labor allows the portfolio managers to concentrate on selecting securities and structuring portfolios, normally with a time horizon measured in months or years. The traders focus on the dynamics of the market, gauging the appropriate day, hour, or even minute for completing a transaction. Separating the trading function from portfolio management has another benefit: it involves a second set of eyes in every transaction, which helps to ensure that a fund complies with all regulatory requirements.

The execution of trades is far from a mechanical process. It calls for close collaboration between portfolio managers and trading desks. Decisions on how, where, and when to execute orders require careful judgment, long experience, and intimate knowledge of the trading markets. Well-planned ...