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A N A LY S I S
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hese days, the buy-side is
looking to find out more
and more about where
brokers are sending its orders.
For many years now, full broker
transparency on order routing has
been difficult to attain, but in an
environment driven by perfor-
mance and regulation this is about
to change.
There are several reasons why
the majority of brokers currently
do not - or in some circumstances
cannot - provide the buy-side with
such a granular level of detail. Leg-
acy systems, conflicts of interest
and the fact some buy-side firms
are simply not asking brokers for
the information, all play a part in
keeping the order routing process
so enigmatic.
Back when electronic order han-
dling first took off in the trading
world, broker systems did in fact
send thousands of orders, cancels,
executions and messages to buy-
side systems. It was a torrent of
information the buy-side basically
couldn’t handle. In response to
this, brokers began to develop fil-
ters within their systems to ensure
only execution data was sent to as-
set managers and ever since, these
filters have remained in place.
Now the buy-side wants that data
back, but the information could
prove to be detrimental to brokers
who stand to lose a significant
amount of business should the buy-
side not approve of where orders
are being sent. Or, in other words,
brokers are at risk of the informa-
tion being used against them in a
competitive sense. For Dan Royal,
global head of equity trading at
recently merged asset manager Ja-
nus Henderson, spotting potential
broker conflicts of interest through
order routing is a tedious, but nec-
essary process.
“Often we are left at the mercy
of the analysis provided by the
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Autumn 2017
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broker and as buy-siders we can
be very skeptical of the data,” he
says. “Nobody will tell you if there
is a conflict of interest, but if you
can uncover that through detailed
analysis you can begin the conver-
sation with your broker. Looking at
a larger sample of data you can gain
a sense of who is doing a better job
Jonathan Clarke has more than
20 years experience working at
various asset management firms
including Blackrock, where he
headed up equity trading for the
Americas. Currently, he is the chief
executive of a firm born out of the
buy-side’s frustration with obscure,
conflicted and costly methods of
“Some will say they prefer to use the traditional
methods to evaluate performance rather than go
into such granular detail.”
JONATHAN CLARKE CEO, LUMINEX TRADING & ANALYTICS
in routing logic.
“But without routing transpar-
ency, we are less informed. Not
having the data around venue
analysis or how an algorithm is
performing in relation to others,
puts you in the dark in terms of
making informed decisions.”
Avoiding conflicts
Rob McGrath, the former global
head of trading at Schroders and
now FinTech consultant, tells a
similar story to Royal but reiter-
ates a lack of full order routing
transparency is not just about
avoiding potential broker conflicts
of interests, for the buy-side it is all
about costs.
He explains being in control of
costs on the buy-side is imperative
because failing to do so could see
other market participants leading
your trading strategy, sometimes
without your best intentions at
heart.
“It was an issue for us at Schro-
ders because we were so aware of
trading costs. We implemented
trading technologies to optimise
and ensure we had full control of
those costs,” McGrath says. “It’s
important to bear in mind the lack
of transparency allows brokers to
make more money.”
order routing.
Clarke’s time on the buy-side
spent battling with the lack of
order routing transparency echoes
that of both Royal and McGrath.
He has witnessed the market culti-
vate complexity and fragmentation
and says this has brought about the
need for more transparency.
“Throughout my time on the
buy-side, I did a lot of work on
broker-routing and order destina-
tion analysis,” says Clarke, CEO at
Luminex Trading & Analytics. “I
wanted to know where my orders
were going, where I was having
success and failures, and which
trading venues were charging high-
er fees for my orders.”
Alongside the potential for
conflicts of interest, the technolog-
ical architecture is still not up to
scratch on the buy- or sell-side. For
both, it’s a painful and expensive
process to change systems that
have been in place for many years.
It requires significant investment
in not just the technology but
development resources if the
system in question does not have
the capacity to disclose or interpret
the data.
Analyse and understand
“There are a lot of levels to the