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How Can Advanced Execution Strategies Minimize Transaction Costs and Optimize Copy Trading Strategies on Politician Portfolios.

Have you ever wondered how some politicians seem to make remarkably successful stock trades? This isn’t just luck; it’s a strategy you can tap into as well. Under the STOCK Act, every Congressman must disclose their stock trades within 30 days to the Clerk of the Senate or House of Representatives. These disclosures are a goldmine for savvy traders. By intelligently copying the trades of these influential figures, you can potentially profit from their market moves. Understanding the mechanisms behind these disclosures shines a light on possible insider trading, and also opens up a unique opportunity for you to enhance your trading returns.

Why are congressman traders successful?

Let’s dive deeper into the world of congressional trading and see how you can turn their success into your advantage. Over the 2023 calendar year, several Congress members emerged as exceptionally successful investors, with four — Brian Higgins, Mark Green, Garret Graves, and David Rouser — achieving triple-digit returns. In this article, our focus is on Nancy Pelosi, who managed a notable 65.5% annual return.

So, what makes Congress members so adept at picking stocks? The success of these politicians has raised eyebrows among journalists and citizens alike, and rightfully so. Many successful hedge funds and professional asset managers struggle to achieve similar results. The primary reason behind their success is often attributed to their access to insider information. Congress members are privy to critical information about upcoming laws and regulations, which can significantly impact the fortunes of companies and entire industries.

Even more surprising is how frequently they get away with it. In 2022 alone, 78 Congress members violated the STOCK Act, facing minimal consequences with fines as low as $200. This systemic issue has led to a scenario where politicians can capitalize on their positions of power with little to no repercussions.

Mastering the Market Impact of Congressional Disclosures

Congressional disclosures offer a unique opportunity, but naive copy traders often face significant market impact challenges. When Congress members disclose their trades, the information becomes public, leading to increased trading volume and heightened volatility around those stocks. This surge in market activity can distort prices, making it difficult for copy traders to match the returns of the politicians they are mirroring.

However, traders can turn this challenge into a distinct advantage. By mastering the art of best execution and optimizing trading costs, you can potentially outperform even the most successful congressional traders. This involves applying advanced transaction cost analysis (TCA) and execution strategies to your trading. These strategies enable you to strategically enter and exit positions, minimizing the costs associated with trading and fully leveraging the insights from congressional disclosures.

We will delve into optimizing your transaction costs and execution to maximize your returns. Keep reading to learn how layering a sophisticated trading strategy on top of congressional copy trading can give you a significant edge in the market.

What is Nancy Pelosi’s Portfolio Like and How Does it Perform?

Nancy Pelosi’s trading record has become a focal point for many retail traders looking to boost their returns. She has predominantly traded tech stocks, making strategic investments in companies like Palo Alto Networks, Nvidia, and Apple. This focus on high-performing tech stocks has resulted in impressive returns, prompting many to attempt to mirror her portfolio.

Pelosi’s consistent success isn’t just a matter of public record; it’s a blueprint for potential profit. By tracking all of her trades and analyzing the returns, you can gain valuable insights into which stocks to watch and when to act.

To truly capitalize on Pelosi’s trading prowess, it’s essential to understand how to backrun her trades effectively. This involves not only mimicking her portfolio, but also applying advanced TCA and execution strategies to minimize costs and optimize your entry and exit points. By doing so, you can potentially achieve even better returns than those simply following the disclosures.

The Secret to Outperforming Pelosi: Timing and Strategy in Congressional Copy Trading

To truly harness the potential of Nancy Pelosi’s trading insights, a sophisticated understanding of how to effectively backrun her disclosed trades is crucial. At Blockhouse, we view the replication of her portfolio as merely the starting point. It’s imperative to dig deeper into the mechanics and timing of her trades to fully optimize investment returns.

The provided graph delineates the performance trajectory over the subsequent 500 trading hours (approximately 1.5 months) following the public disclosure of Pelosi’s positions. This dataset aggregates all transactions from the past 18 months. Our analysis suggests a nuanced approach to maximizing returns from these insights. Instead of immediate replication, which is a common but rudimentary strategy, our research supports a more refined tactic.

We’ve identified a strategic entry point: initiating positions 9 trading days post-disclosure. This delay allows for the dissipation of initial market volatility caused by the public’s reaction to the disclosures, thus mitigating adverse price impacts often incurred by immediate followers. Holding these positions for an additional 45 days (approximately a month and a half) optimally aligns with the cycle of information assimilation in the market, enabling investors to capture the full potential of the trading window before market efficiency adjusts the prices.

Comparatively, a simplistic strategy of copying her trades immediately upon disclosure and maintaining those positions for three months yields a modest 9% annual return. However, our advanced strategy — which aligns with Pelosi’s trading acumen — aims for a calculated entry and a precisely timed exit. This approach projects a return of 10% over just the initial 45 days post-disclosure, which, when annualized, scales up to an impressive 95.5%. This refined strategy not only closely mirrors the returns Pelosi realized, but exceeds them — optimizing the market’s structural responses to these disclosures.

AAPL Deep dive into Returns

After demonstrating the potential to optimize returns through strategic timing on Nancy Pelosi’s trades, let’s apply this approach to a significant holding in her portfolio: Apple (AAPL). By examining the returns from mirroring Pelosi’s position in Apple and holding for three months, we can further validate our refined trading strategy.

Our analysis leverages detailed insights into the timing and scaling of market entries post-disclosure, factoring in the critical component of transaction costs. The graph in question tracks the performance of Pelosi’s AAPL position over a three-month period, with the x-axis indicating the lag time after trade disclosures — a crucial element in determining the optimal entry point. The y-axis adjusts for the volume of shares traded, effectively accounting for the impact of transaction costs on overall strategy performance. The color gradient of the heatmap represents the variability in returns throughout the holding period, providing a visual guide to identifying peak profitability zones.

Our findings pinpoint that the highest returns, when adjusted for transaction costs, occur when the stock is held for the longest evaluated duration. The ideal window for entering trades post-disclosure falls between 20–30 trading hours, roughly translating to about one week after Pelosi’s trades go public. This interval offers a strategic advantage by mitigating the excessive market volatility immediately following the disclosure — a period often characterized by inflated prices that can diminish profitability.

Entering the market too late is equally disadvantageous, as the initial surge in stock price would have already capitalized most of the available alpha, leaving latecomers to contend with diminished returns. Our analysis recommends an optimal entry at approximately 25 trading hours post-disclosure. This timing strategy ensures investors engage with the stock at a point where initial volatility begins to stabilize, yet before the market fully adjusts to the new information, thereby maximizing return potential.

Refining Execution Timings for AAPL: A Strategic Approach to Minimizing Costs

In our continuous effort to enhance the execution strategy for trading AAPL following Pelosi’s disclosures, we’ve focused on pinpointing the most cost-effective moments to execute trades. The heatmap below uses a time scale(trade events in the 4 days after announcement) as the x axis, share count(how many shares are ordered) as the y axis, and the temperature of the graph represents the total per share transaction cost associated with executing the trade(the sum of the linear bid-ask spread as well as the quadratic market impact cost). This was created using Trade with Best Bid and Offer (TBBO) data, which gives us top-of-book liquidity metrics and a real-time view of how the bid-ask spread and depth change. This detailed view allows us to identify when and how transaction costs fluctuate and to strategize accordingly.

The local minimum of the transaction costs occurs at the (29,0) index, which is intuitive because the transaction costs are lowest for lower share counts as the slippage cost is reduced, but also because of the suggestion by the model to trade on the fourth day. This recommendation is consistent with our first heatmap that suggests we should trade roughly one week after the disclosure of the trades.

The share count independent minimum occurs at the 25th column, which is still far over to the right side. This adds some nuance in that investors who seek to trade at larger notional amounts would benefit from executing their trades at a slightly earlier time than the original recommendation. They should execute around 3–4 trading days after the announcement instead of waiting the full week.

The reasoning for this specification is most likely because the dollar volume traded is highest directly after the announcement of the purchase, and it rapidly decreases. Thus, although the linear costs are better at later execution times, institutional investors and high net worth individuals have to worry more about the quadratic slippage costs and trade earlier in order to fill more of their position at a more reasonable transaction cost.

This refined timing strategy aligns with our goal of reducing transaction costs but also adapts to market dynamics, ensuring that investors and institutional traders can execute their trades at more cost-effective times. This approach optimizes both the entry point and the scale of operations, balancing the need to act swiftly with the necessity of minimizing market impact and costs

Takeaways to Outperform Politicians by Strategically Back-running Their Trades

Our rigorous analysis has optimized institutional trading strategies by capitalizing on the timing of congressional disclosures, notably focusing on Nancy Pelosi’s trading activities. By refining the timing of entries and exits, we’ve pinpointed that executing trades between three to four days post-disclosure maximizes profitability, evidenced by an increase in potential returns up to 10% over just 45 days, annualizing to a remarkable 95.5%. This period strategically avoids the peak of market volatility and excessive transaction costs that are typical immediately after disclosures.

By steering clear of trades immediately post-disclosure, institutional traders can mitigate risks associated with high market volatility and inflated transaction costs. Our advanced strategies enable these traders to leverage initial market reactions effectively, transforming these insights into substantial financial gains.

Adopting these refined strategies provides institutional traders with a robust framework to outperform the successful trades typical of congressional disclosures. As market conditions evolve, the continuous adaptation and application of these precise, data-driven strategies will be crucial. Such approaches ensure that institutional traders can convert public information into significant private gains, achieving superior alignment with investment goals and comprehensive risk management, while targeting specific returns that substantially outperform standard market engagements.

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If you want us to analyze specific copy trades or conduct a personal analysis of your portfolio and trade history, please email us at accounts@blockhouse.capital.

Disclosure

The content of this blog is intended for informational and educational purposes only and should not be construed as financial advice. The strategies and insights discussed are meant to provide a deeper understanding of copy trading politicians and should not be interpreted as specific investment recommendations. Readers are encouraged to consult with a professional financial advisor before making any investment decisions.