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The Trading Mesh

Generating Alpha Using IPO & Secondary Issue Data

Thu, 10 Mar 2016 04:11:40 GMT           

 

By Stuart Farr, Deltix

 

The markets are currently in a risk averse state, at least in part as a consequence of rapidly-evolving geopolitical issues and slowing market growth in China. As a result, the IPO and secondaries markets slowed in late 2015 and have remained sluggish in the first quarter of 2016. Nonetheless, companies will still need access to the capital markets this year, even if it is not at a frenzied pace. 

Trading IPOs and Secondaries

Developing a strategy for trading IPOs and secondaries is not trivial. Issuers push the news out to promote their offerings, sometimes resulting in excessive and unfiltered news and hype. This makes it challenging to generate accurate signals for a trading strategy. It can be helpful to have a tool that can track news and provide indications as to whether, and by how much, a stock price is likely to move from its  offering price in the first few days of trading. 

Triad Securities’ “New Issue Service” provides a select view of IPOs and Secondaries and how they are affected by variables in the global financial markets.  It includes proprietary consensus reports indicating the anticipated pricing of IPOs or Secondaries.  These reports provide indications on deals, projected first day prices or price ranges on IPOs and a consensus indicator on secondaries. 

Triad's New Issue Service highlights subtle changes in the new issue and secondary markets from the moment of filing through pricing. 

 

Can We Generate Alpha with IPO Consensus Data?

Our Quantitative Research Team sought to determine if there are opportunities to generate alpha in US equities, using Triad data as a basis for market movement prediction after IPO events or after secondaries pricing.

We loaded Triad data and associated market data into Deltix TimeBase and then developed, tested and refined candidate trading strategies in Deltix QuantOffice. The strategies were back-tested on in-sample data for the years 2008-2014, while 2015 data was included for out-of-sample testing.

The Trading Strategies

For the first strategy, based on Triad’s consensus data for IPOs, we entered long or short positions one week after the IPO. For the second strategy, based on Triad’s consensus data for secondaries, we entered long positions only, but hedged the positions with the SPY ETF. Back-testing showed that the two strategies (the first for IPOs, the second for Secondaries) had Sharpe Ratios of 2.11 and 2.73 with average profits per share of $0.20 and $0.09 respectively for the eight years of 2008 to 2015.

Implications of the Research

The results from this research demonstrated that there are opportunities to generate alpha using Triad’s Consensus Data for IPOs and Secondaries. Based on these results, we think firms would find it worthwhile to invest in further research. For example, firms might want to experiment with different time periods after the IPO, various holding periods, different hedging strategies, and/or alternative execution approaches. 

QuantOffice makes it easy to implement and back-test these variations. Utilizing QuantServer in addition allows users to deploy the strategies for live simulation and production trading.

You can register and download the research study here.

You might also be interested in the research we published last quarter where we tested whether it was possible to generate alpha using earnings date revisions data from Wall Street Horizons.

This article first appeared on the Deltix blog.