[ I N - D E P T H
|
T C A ]
in terms of understanding how algorithms operate
in certain market conditions. If a trader is missing a
benchmark in volatile market conditions, for exam-
ple, the TCA will spot this and the desk can monitor
the results.
Refining workflows
Typically, venue-level performance metrics have
been considered as being ‘nice to know’ for buy-side
traders. This is now shifting as venue analysis is
increasingly being deployed as an explanatory factor
for macro-level performance evaluation.
“We don’t dictate the venues which brokers choose
to access as this is up to their own smart order
routing logic to decide,” Nicholls explains. “It is
important though, for us to understand why and
which venues are selected, as this impacts execution
performance. This in turn effects which brokers and
algorithms we route to.”
Hermes looks at venue performance in two ways. If
“It is necessary to try new brokers and new
algorithms to further improve our processes. If
we didn’t do this, we would never improve the
quality of our executions.”
Hermes diverts flow there to
monitor performance closely and
to ensure the adjustments are
having the desired impact. This is
considered to be of immeasurable
value to the buy-side trading desk
a broker or algorithm is missing intended bench-
marks, or if a venue is experiencing adverse price
movements relative to the rest of the market, then a
deeper analysis is carried out. The venues are also
categorised by type, such as lit, dark, systematic
internaliser (SI), electronic liquidity provider (ELP),
or request for quote (RFQ), to allow the trading desk
to outline broker routing behaviour.
For example, forensic analysis can show Broker A
is not interacting with SI liquidity whereas Broker
B is, and they are outperforming. In fact, Broker B
is trading with SI liquidity and achieving larger fills
than the rest of the market, having a lower impact
and capturing the spread. If this holds over a suit-
able sample size, there is a credible case to defer this
segment of the desk’s flow to Broker B. If the sample
size is low, it is added to the watchlist until the trend
is confirmed.
There are several actionable steps that the trading
desk can take following intense venue analysis. If the
analysis shows high reversion in a dark venue but
large blocks are being filled, then Hermes doesn’t
Issue 63 // thetradenews.com // 21