Lesson 8 of 25 · 6 min
Position size measured in days of trading volume
A position has a second size, quoted in days rather than dollars, and that is the one a schedule is built around.
Dollars are the wrong unit for a liquidation. A lender selling collateral cares how long the sale takes, and the answer comes from shares and volume rather than from market value.
The conversion needs two inputs. The first is average daily volume, the typical number of shares changing hands in a session. The second is a participation rate: the share of a day's volume the seller assumes it can take without pushing the price against itself. Ten to twenty percent is a common illustrative range.
days to liquidate = shares held ÷ (participation rate × average daily volume)
- days to liquidate
- Trading sessions required to exit the whole position at the assumed pace.
- shares held
- The pledged share count, not its dollar value.
- participation rate
- The fraction of each session's volume the seller assumes it can absorb.
- average daily volume
- Typical shares traded per session in that name.
Two positions in the same company make the point. Average daily volume is 310,000 shares and the assumed participation is 18 percent, so the sustainable pace is 310,000 × 0.18 = 55,800 shares a day. A 148,000-share position takes 148,000 ÷ 55,800 = 2.65 days. A 940,000-share position takes 940,000 ÷ 55,800 = 16.85 days. The company is identical, the volatility is identical, and the exit is six and a third times as long.
This is why a schedule cannot price concentration in dollars alone. Doubling a dollar position doubles days to liquidate, and lesson 9 shows the discount growing with the square root of those days rather than in proportion to them. The unit conversion has to happen before the discount can be computed at all.
Key terms
- Average daily volume
- The typical number of shares traded in one session. It sets the pace at which a large holding can be sold.
- Participation rate
- The fraction of a session's volume a seller assumes it can take without moving the price materially against itself.
- Days to liquidate
- How many sessions an exit would require at the assumed pace. It is position size expressed in time.
Worked example
The same company, two exit lengths
Average daily volume 310,000 shares. The lender assumes an 18% participation rate. Two pledged positions: 148,000 shares and 940,000 shares. Illustrative figures.
- Sustainable daily pace
- 55,800 shares
- Smaller position, days to liquidate
- 2.65
- Larger position, days to liquidate
- 16.85
- Ratio of share counts
- 6.35
- Ratio of exit lengths
- 6.35
310,000 × 0.18.
148,000 ÷ 55,800.
940,000 ÷ 55,800.
940,000 ÷ 148,000.
Days scale in proportion to size.
Nothing about the company differed between the two rows. The exit went from part of one session to more than three trading weeks.
Check yourself
You pledge 64,000 shares of a company that trades 260,000 shares a day, and the lender assumes a 12% participation rate. How many days is the exit, and what happens if the position triples?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.