[ I N - D E P T H
|
T C A ]
would never improve the quality of our executions.
To misquote Einstein: ‘Poor execution is doing the
same thing over and over again and expecting a
different result’.”
When trading low-touch market impact orders,
timing is perhaps most readily the means by which
the trader will generate alpha. Like many institu-
tional asset managers, Hermes does not have pro-
prietary algorithms, but uses broker algorithms for
orders that constitute a low percentage of the daily
volume. Orders must be categorised into high- and
low-touch, and a low-touch order should never be
given to a high-touch broker due to higher com-
mission charges. It’s very likely they would use an
algorithm anyway.
For high-touch orders, traders at Hermes aim to
cross blocks by trading against the natural liquidity
with scraping networks or high-touch brokers, both
of which demand higher commission. If the market
environment is tough and no natural liquidity is
available, working with a broker that trades the most
in the security is considered the best way to save the
cost of the spread.
Like-for-like
Data is key to the TCA process, and it is widely
agreed that the more data, the better. At Hermes,
the order management system feeds extracted tick
data from each transaction across asset classes to
the TCA platform. The measurable parameters span
a six-month period or longer, as analysis of a period
less than this could produce false positives or outli-
ers due to volatile days in the market that may cloud
any drivers of performance.
This can be a headache. But Hermes aims to ad-
dress the mountains of data and numerous bench-
marks required by streamlining the data and asking
specific questions on whether the trader’s decisions,
algorithms, brokers, venues, and timing helped the
trading desk beat the benchmark.
“We use the insights gained from our analysis as a
tool to help replicate good trading behaviours and
reduce any bad ones. If the data is measurable and
meaningful, it should be analysed. TCA must of
course be understandable and actionable otherwise
its purely academic, which would clearly be less
helpful for the traders,” Nicholls explains.
Hermes uses this information on the quality of
executions it receives from brokers and their algo-
rithms to inform routing decisions in the future.
Nicholls adds it is imperative to understand the
nature of the flow that the desk is giving to a broker
Issue 63 // thetradenews.com // 19