What it means
When a big investor wants to sell a very large block of shares, the usual worry is that the order will move the market against them. If other traders sense the selling, they may sell first or lower their bids, so the price falls before the investor has finished.
That cost, called market impact, can be a meaningful share of the value of the trade. Sunshine trading takes the opposite approach to hiding the order.
The trader announces in advance that a large order will be executed, often with details such as the stock, the size and the time window. Other participants can then prepare to take the other side, which can bring in extra liquidity (the ability to trade without moving the price).
The practice was discussed in connection with large index-related trades and portfolio changes. Because it is a deliberate form of disclosure, it contrasts with tactics such as slicing an order into many small pieces or using hidden order types.
Which approach works best depends on how liquid the security is and how much information the announcement gives away. There are risks.
Announcing a trade can invite front-running, where another trader buys ahead of the announced buyer to profit from the price rise, and it can leave the announcing party worse off than a quiet execution. Rules on market conduct also matter, so large traders take compliance advice on how and where such announcements are made.
For a non-specialist, the point to take away is that execution quality is a real cost. A fund that moves $20 million of shares at a poor price loses performance in the same way as a fund that pays high fees.
Careful traders measure that cost and choose between secrecy and openness according to the circumstances.
In practice
Real-world examples.
Example
A pension fund needs to sell $50 million of a mid-sized company's shares to rebalance its portfolio. It announces the sale through its broker to attract institutional buyers, which allows it to sell most of the block in a single negotiated trade.
Example
An asset manager is rebalancing an index fund and tells the market which stocks it will buy at the close. Other traders prepare to supply those shares, so the fund avoids pushing the closing price higher.
Example
A hedge fund considers announcing a large purchase but decides against it. The analyst's testing shows that rivals would probably buy ahead of the order, and that the cost of that front-running would exceed any gain from added liquidity.
Formula
Calculation
Saving from lower market impact = trade value x (impact without announcement - impact with announcement)
Suppose a fund wants to sell 500,000 shares at $40, so the trade value is 500,000 x 40 = $20,000,000. If a quiet sale would be expected to push the average price down by 1.5%, the cost is 20,000,000 x 0.015 = $300,000. If an announced sunshine trade attracts buyers and limits the impact to 0.5%, the cost is 20,000,000 x 0.005 = $100,000. The saving is 300,000 - 100,000 = $200,000, which is 1% of the trade value.Case study
Seen in the real world.
Northgate Asset Partners is an illustrative, fictional manager with $2 billion in client assets. Its portfolio team needed to exit a position worth $30 million in a thinly traded stock after a change in strategy.
Past experience suggested that quietly selling in small pieces over several days would still depress the price by about 2%, or $600,000. The head trader instead arranged for the sale to be shown to a group of institutional buyers who had previously expressed interest in the stock.
Because several buyers were prepared in advance, the block cleared in one afternoon with an impact of about 0.7%, or $210,000. In this illustrative case, the team documented the saving of roughly $390,000 and recorded the approach as an option for future large sales in illiquid stocks.
Watch out
Common mistakes.
- Assuming that hiding a large order is always the best way to protect its price, when advance disclosure can sometimes draw in the buyers or sellers needed.
- Announcing a trade without considering front-running, which can push the price against the trader before the order is filled.
- Measuring only the commission on a trade and ignoring the market impact, which is often the larger cost.
Questions
People also ask.
Is a sunshine trade the same as a block trade?
Not exactly, because a block trade is simply a very large trade, while a sunshine trade is one whose details are announced beforehand.
Why would a trader reveal their plans?
They hope to attract counterparties, which can lower market impact and lead to a better overall price than a quiet sale.
Is sunshine trading legal?
Announcing a genuine trade is generally permitted, but rules differ by market and the announcement must not be misleading, so firms usually take compliance advice.
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