PT  - JOURNAL ARTICLE
AU  - Dmitry Rakhlin
AU  - George Sofianos
TI  - Choosing Benchmarks vs. Choosing Strategies
DP  - 2006 Mar 20
TA  - Trading
PG  - 75--81
VI  - 2006
IP  - 1
4099  - http://guides.pm-research.com/content/2006/1/75.short
4100  - http://guides.pm-research.com/content/2006/1/75.full
AB  - In this article, we use execution data from the Goldman Sachs algorithmic trading desk to compare the performance of VWAP and shortfall algorithms. Our analysis shows that the two algorithms work as intended: shortfall performs better than VWAP when short-term (ST) alpha is high, helping traders to reduce alpha loss. The shortfall algorithm also delivers lower execution risk. We also find, however, that the average trader does not optimally allocate orders between the VWAP and shortfall algorithms. Our findings suggest that providers should better educate users on the relative merits of VWAP and shortfall algorithms and better quantify the trade-offs. If users cannot easily differentiate between high and low ST-alpha orders, a practical alternative is to choose the one algorithm that best fits the overall characteristics of their order flow.