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Minyan Mailbag:



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Dear Professor Succo,

Why do strong markets tend to end strong and weak markets end weak for that particular day?


Minyan Bruce,

We have touched on this indirectly before.

Money managers when they get new money in and decide to put it to work often just buy more of the same stocks that they already own. The most effective way to execute this is through a program trade.

As much as 40-45% of all trading in stocks is now done through programs. Most of these programs are based on VWAP (volume weighted average price). The broker is rewarded for beating the volume weighted average price of a portfolio or stock for the day by being paid extra commission.

In order for the brokers to optimize their chance of meeting or beating this price they have to buy or sell most of the volume very close to the end of the day. Therefore, if there is a buy program to be executed, they buy some in the morning and throughout the day, but save a great deal of the volume for around the close. This drives up the price of the execution, which is bad for the client, but gives the broker the best chance of beating the average.

Why the client is not more sensitive to the actual execution price is disingenuous. By driving up the prices of stocks they already own, they actually help their performance, at least in the short run, at the expense of the new money. But if they continually get money in, they can use this "Ponzi" strategy for long periods.

This is why it is so important that these funds continually get money in, and why I would stay away from them.

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No positions in stocks mentioned.

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