Stock-Specific Peer Group Analysis and its Application to Portfolio Liquidity
Authors: Ian Domowitz and Kumar Giritharan
All data in this paper are sourced from ITG Inc.
We introduce an activity-based approach to trading performance comparisons, in which the common denominator is an individual security. The framework facilitates answers to three questions. Is there valuable information in peer trading comparisons if one analyzes performance on a stock-by-stock basis? Aggregated comparisons across institutions and brokers disguise important differences in the effectiveness of trading process. How does a stock trade? An answer lies in the characterization of single-stock profiles. The approach exploits institutional trading activity, combining such information with market data, and repurposing old tools with the goal of reducing institutional trading cost. How does one characterize the liquidity profile of a portfolio? The answer relies on observed liquidity, as evidenced by institutional trading activity. The solution depends on building the portfolio profile up from individual securities, and yields not only the implementation costs of liquidation, for example, but also the horizon over which this may be accomplished.