151Introduction
There is an oft-quoted maxim, “Concentrate on what you do best and dele-
gate the rest.” Going with this idea, the general preference of the arbitrageur
is to concentrate on deal analysis and delegate trade execution to a broker.
The execution in this case is fairly involved, as the trades need to be done on
a paired basis. Not only must the broker ensure that the positions in both the
stocks satisfy the particular exchange ratio, but he or she also needs to en-
sure that the fill prices on the stocks capture the specified spread. Thus, at
all times the broker needs to ensure that the ratio and spread constraints are
satisfied. Given that the execution is fairly involved, there are only a select
number of brokers who accept orders to be executed on a paired basis. In
any case, there is now a need to specify the order unambiguously to a bro-
ker. We will discuss the unambiguous specification of a paired transaction
in this chapter. There is also a need to verify that the order was executed to
satisfaction. We will also discuss issues pertaining to execution quality and
the criteria that could be used to measure it.
Next, we address trade executions in fixed value exchange transactions.
Recall that in such transactions, the exchange ratio is gradually revealed as
the pricing period unfolds, and the exact exchange ratio is known only at the
end of the pricing period. This seems to carry with it the implication that the
spread position can be put on only after the end of the pricing period and
not any time before that. However, that need not be the case. It is possible
to put on a spread position during the pricing period and still manage to be
perfectly hedged. We will discuss how that can be accomplished.
Also note that we expect to enter into a short position of considerable
size on the bidder stock when putting on the spread; that is, we need to ex-
ecute a short sale on the bidder stock. A short sale is the sale of stock that the
seller does not own but is committed to repurchasing eventually. The New
York Stock Exchange and the NASDAQ stock market require that any short
sale must occur when the price is rising; that is, on an uptick. Therefore,
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