[ A D V E R T O R I A L ]
ation of best execution analysis
must incorporate more upfront,
pre-trade analytics to assist in the
correct selection, rather than being
seen as a box-ticking validation
exercise. Buy-side firms are looking
for smarter, enhanced analytical
tools, better ways of comparing
trades with peers trading similar
benchmarks, and tools that facili-
tate best execution analysis across
every asset class they trade, with
criteria they can set themselves.
The rationale behind the trade
will dictate what can be perceived
as best execution:
- speed
- certainty of execution
- overall cost of the order (as
opposed to trade-by-trade best
price), and
- counterparty risk
These objectives are universal,
regardless of the instrument being
traded, and 72% of our survey par-
ticipants would include consider-
ation of all these factors.
However, depending on the
investment strategy of the portfolio
manager and the urgency, each
factor has a different weight - if the
emphasis is price, the quality of
the execution algos is in play; if the
instruction is to get it done quickly
or the stock is very illiquid, then
access to liquidity is paramount.
For an investment over five years,
the short-term impact of paying up
versus not getting the stock is an
irrelevance, as there is a trade-off
between the cost and the value of
considering every factor.
BXA: more than vanilla
BXA must deliver more than vanil-
la cost analysis. Routing, risk and
venue analysis remain very import-
ant in today’s fragmented markets,
but the data describing the reason
behind the trade and any con-
straints must also be built into the
process. While this data may be
hard to get in the illiquid or voice
markets, it is invaluable when try-
ing to understand the performance
outcomes. The analysis therefore
needs to include pre-trade market
impact estimation, which can help
in alerting traders to unexpected
outcomes as trading proceeds.
“MiFID II reporting will
necessitate the ability
to mine data far more
intelligently.”
Firms are already addressing
this by moving away from a blunt
TCA benchmark which obscures
the additional information behind
the decision. In contrast, a hybrid
TCA helps translate the snapshot
benchmark into something more
valuable, for example, a blended
benchmark that looks at Arrival
Price and VWAP with standard
deviation on any given day.
While the majority of firms use
IS and variations of WAP, 40% use
custom or hybrid benchmarks, or
benchmarks such as indices; and
although benchmarks are used
consistently, the majority of firms
make allowances for different types
of flow.
Challenging times
Managing a best execution policy
globally creates challenges when
firms have different portfolio
managers with multiple strategies
and regional variations as well as
individual trader bias. Hence the
value seen in drawing in more
harmonised data points at every
point in the chain between order
creation and trade, to demonstrate
what decisions were taken where,
when and by whom.
The pursuit of analytical har-
monisation across instruments
requires comprehensive data and
comparable analytics. As a result,
buy-side firms will continue to
move away from trawling through
broker TCA towards a creative, in-
dependent thought process that is
provider- and instrument-agnostic.
Best execution analysis solutions
will need to be created off the
back of individual firms’ policies
and procedures based on specific
objectives, but firms will be able to
leverage measurement frameworks
such as TCA to contribute towards
determining this, using a data-driv-
en approach.
The components of BXA are still
emerging. For equities, consider-
ation and implementation of algo
wheels coupled with reduction in
algo providers will give firms deep-
er, richer data rather than an in-
comparable scatter of trades across
multiple brokers. But this will
require tighter homogenised data-
sets to mine data to the granular
level now required. Expectations of
full and accurate FIX tags will plug
gaps in knowledge, together with a
greater expectation of information
about high-touch trades.
While two-thirds of participants
surveyed monitor for systemic
price reversion currently, a further
24% are working on implement-
ing it. Most rely on their brokers,
commonly using minimum fill
sizes and limits as preventative
measures. Participants are mixed
about where the responsibility for
monitoring toxicity lies, feeling the
brokers are better placed and per-
haps reluctant to tell the brokers to
turn off venues.
However, with fuller data sets,
greater responsibility under MiFID
II, and enhanced analytics, the
buy-side will gradually take more
control and ownership of evidenc-
ing best execution.
Issue 53
TheTradeNews.com
35