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Basket trading is the trading of a group of securities in a single order. Typically, these securities are put together in order to achieve a specific investment goal. In order to be eligible to basket trade, investors are usually required to purchase a minimum number of securities. While this minimum is often set at ten or 15, it will vary based on the requirements of the brokerage service facilitating the basket transaction.
Basket trading is a commonly-used investment strategy among program traders, hedge funds and large institutional investors who have significant amounts of money to invest. Small investors may also use this type of trading as a method for mitigating risk because it can help diversify the stocks in an investment portfolio to a variety of different sectors. Trading stocks is one of the most standard types of basket trades. Other frequently traded securities include currencies, futures and similar financial instruments.
In a typical basket transaction, an investor allocates weightings to the securities in his or her basket. These weightings are usually expressed as shares, dollar amounts or percentages. Share weighting methods typically deal out shares to each position in the basket. Dollar weighting and percentage weighting methods allocate the dollar amounts or percentages to each position in the basket.
Basket trading may provide a number of advantages for investors and traders. One key benefit is the ability to place multiple trades in just one order, allowing investors and traders to be more efficient in managing their securities. These trades also provide investors with the ability to tailor their investment portfolios to their specific needs and goals. For example, investors can arrange their baskets by a range of categories such as price, market capitalization, goals, or industry/sector.
Maintaining a high level of control over trading portfolios is another potential benefit to this type of trading. An investor has the option of trading selected individual securities within a single basket or trading the entire basket. This function allows an investor to control the timing of any trades that he or she conducts. In addition, it allows the investor to monitor any tax implications that may be associated with basket transactions.
Brokerage or investment firms routinely offer basket trading as an option for investors and traders. Although these firms typically do not charge investors additional fees for trading, a minimum investment amount is usually required in order to purchase a basket. The amount will vary depending on the brokerage that is used. For each security in a basket that is sold or purchased, most firms charge standard transaction commissions or other fees.
In a nutshell, you expect a basket of currencies/stocks/commodities to do better against another basket due to some correlations going out of sync. Statistical trading, more like it.
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