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move to shut it off, but to avoid the high reversion
on small size prints the desk may request that the
broker applies a minimum execution size to avoid
that in the future. Likewise, if other brokers with
similar flow are accessing liquidity in a better way
then Hermes will divert flow.
The desk also adjusts the smart order routing hier-
archy to avoid recurring bad performance. Outlining
one such instance, Nicholls says the trading desk
had a series of liquid low average daily volume US
names that needed to execute at the open. These
were intermarket sweep orders, spraying all venues,
NBBO (national best bid and offer) or not, and Her-
mes found that too much was being executed on the
regional US venues at suboptimal prices. The trend
was backed up by the desk’s TCA in-depth analysis,
“Until we see the development of a consolidated
tape with a consistent data collection process
and enriched data points to identify addressable
liquidity, which needs to be driven by the
regulator, this is the best we can do.”
indicating that the asset manager had to act.
“Without impacting the time to completion, we
wanted to avoid the regional US exchanges,” Nichol-
ls adds. “Armed with this information, we were able
to highlight the need for a solution with the broker
and amend the smart order routing hierarchy to fill
these small liquid orders in dark pools first. Captur-
ing half the spread by executing at mid and exe-
cuting more quickly than aggressing the lit where
spreads are widest immediately post-open.”
The final actionable step upon reviewing venue
analysis via TCA is to turn the venue off. This is
considered an absolute last resort for Hermes -
turning off a liquidity source is no easy decision. But
if a venue’s performance is unsatisfactory, it will be
avoided through routing decisions, smart order rout-
ing hierarchy adjustments via the broker, or trading
strategy selection, which is the preferred choice for
Hermes.
Despite the focus on venues, brokers and routing
decisions, it is also important to measure perfor-
mance across the entire order lifecycle, alongside
the actions of traders, and use this as an opportu-
nity to refine workflows. Considering slippage and
22 // TheTRADE // Spring 2020
time accrued between the trader
receiving the order and placing
it out the market, for example,
could reveal other areas that the
trading desk needs to improve on.
Looking at the opportunity cost of
not trading in the days leading up
and after the execution can also
prove to be valuable to portfolio
managers.
Huge potential
Like many buy-side firms, it’s
not just equities performance
that Hermes is analysing. Fixed
income TCA is widely-considered
to be the most difficult asset class
to efficiently measure perfor-
mance, and a lot of time can be
spent, or wasted, verifying the
results of analysis against external
pricing sources.
Nicholls explains that the
benchmark his trading desk is pri-
marily measured against for fixed
income is the far touch of the
spread at arrival to the trader and
execution, but this is considered
to be inadequate benchmark data,
lacking standardisation and trans-
parency on the benchmark price.
Being aware of these limitations
means that Hermes relies heavily
on data it truly trusts.
Similar to the process for equi-
ties, broker performance is mea-
sured against the benchmark and
categorised into those with the
most and least orders inside the
benchmark spread for a deep dive
into the figures to reveal each
broker’s performance. Embodying
RFQ to calculate hit rates and quit
rates, for example, can be valuable
input when assessing broker qual-
ity and identifying those brokers
that are perhaps often seeing
the trading desk’s intentions but
failing to deliver.
“We continue to scrutinise
performance to the best of our
capability whilst leveraging