Adverse Selection - Risk that only liquid securities are crossed leaving illiquid securities and mismatched sectors.
Bid/Ask Spread - Difference between the lower bid (broker buys) and the higher ask (broker sells) for a security.
Credit Rating - A measure of a bond's quality as determined by a rating service. Ratings start at "AAA", the highest ranking, through "D" for bonds in default. The analysis uses Bloomberg composite ratings which are a blend of Standard and Poor's and Moody's.
Crossing (Internal) - Using a transition manager's access to index funds or other transition client flow to offset buys and sells. These security transfers are priced at the closing price of the day and are 100% free of commission and market impact costs since they are never shown to any brokers.
Crossing (External) - Using publicly available networks such as ITG's POSIT or Instinet to buy or sell securities at a pre-determined price. These trades are executed at low commission rates and market impact costs are reduced by either executing the match at the mid-point of the bid/ask spread or by pricing the trade at the market close.
Duration - The weighted average maturity of a securities future cash flows. A higher duration indicates greater price sensitivity to changes in interest rates.
Explicit Costs - Represents the most visible, but least significant cost of a trade. Includes commissions and fees.
Delay - Represents the loss in investment value between time of decision to trade and actual order release. Can also arise due to a jump in market prices from the prior night's close to the open, (i.e., open gap).
Fiduciary - Represents those who have discretionary authority or control over fund assets, are free from conflicts of interest, and must act in the interests of the participants of the plan.
Implementation Shortfall - Represents the difference in return between the actual portfolio and the target portfolio.
Implicit Costs - Represents the least visible, but most significant cost of a trade. Includes spread, market impact, timing risk, tracking error, and information leakage.
Information Leakage - The release of material information about a trade before the order is released to the market. Raises total costs since it allows arbitrageurs to trade ahead of the transition.
In-kind Transfers - Securities that are transferred from the legacy to target portfolio. These security contributions are priced at the closing price of the day and are 100% free of commission and market impact costs.
Legacy Portfolio - Portfolio that securities are being transitioned from.
Market Impact - Amount that a security price moves after placing a trade order.
Opportunity Costs - Cost associated with the time gap in transferring assets from the legacy portfolio to the target portfolio.
Over the Counter (OTC) - A dealer dominated trading market where securities exchange hands through direct negotiating between buyers and sellers. The majority of bonds and NASDAQ equity securities are traded OTC.
Pre-trade Analysis - An analysis detailing trading costs (commissions, taxes, market impact, bid/ask spread and opportunity costs), compared against an unmanaged transition providing characteristics of the legacy and target portfolios and highlighting problematic securities to be transitioned.
Post-trade Analysis - A comparison of the actual costs versus the pre-trade estimates of the transition and stated benchmark.
Principal Bid - Represents brokers who commit capital to facilitate trade at price set at a predetermined time in exchange for a premium. In the U.S., all principal trades are executed at the closing price. A blind bid is one that is submitted revealing only general characteristics of the securities, (beta, volatility), and not a specific list of securities.
Target Portfolio - Portfolio that securities are being transferred to.
Tracking Error - The expected deviation from the expected differences in returns between two portfolios.
Unmanaged Transition - Assumes that all trades are done in the open market without the benefit of in-kind transfers, internal crossing or external crossing.
David Lester is a Vice President at Northern Trust Global Advisors. Based in the Toronto office, David leads the asset management sales effort at Northern Trust in Canada. With a focus on providing innovative investment and outsourcing solutions to the marketplace, David will be working closely with pension plan sponsors, charitable organizations, and other institutional investors. David started his investment career in 1996 with a retail mutual fund company. Prior to joining Northern Trust, David spent 12 years at SEI, most recently as the Director of National Accounts where he lead the firm’s institutional sales and marketing efforts.
David has authored a range of articles on pension-related topics in addition to speaking at industry conferences. He is a past chair of the Ontario Regional Council of the Canadian Pension & Benefits Institute and is a member of the Toronto CFA Society.
David holds a Bachelors Degree in Mechanical Engineering from McGill University where he was awarded the British Association Medal for Great Distinction. David graduated from INSEAD in Fontainebleau France with distinction, where he received a Masters Degree in Business Administration.