‘Best Ex’ Democratizes
Once-esoteric gauge of trading efficiency is no longer just the purview of brokers.
Ensuring that the purchases and sales of securities for an investment portfolio happen as seamlessly as possible is increasingly a collective endeavor.
New regulations, technological advances and an increasingly transparency-oriented market mindset are disseminating the responsibility of best execution beyond the confines of sell-side spreadsheets.
“It’s not just the broker anymore,” said Joe Wald, chief executive officer of trading-technology provider Clearpool Group. “By mandate now, it is also the buy side. Looking further up the food chain, you have asset owners that are using asset managers, whether active or passive, that are also looking at best execution and how it impacts their overall performance.”
The U.S. Securities and Exchange Commission implemented Rule 605 and Rule 606 to standardize and improve public disclosure of routing and execution practices, and more broadly, the imminent European ruleset MiFID II holds investment managers accountable for ‘best ex’.
“You’re seeing wider and wider circles in terms of who cares about and who is responsible for best execution,” Wald continued. “That democratization is a really interesting trend that will push everyone to be better and more aware of what’s happening.”
Colorado Public Employees’ Retirement Association manages more than $47 billion on behalf of 560,000 teachers, municipal employees, state troopers, judges and other public-sector workers. The organization manages more than 56% of its assets internally, compared with an average of closer to 25% for large U.S. public pension plans.
Stocks comprised 55.9% of the portfolio as of year-end 2016. “Colorado PERA has long sought ‘best execution’ in its equity trading,” said Amy McGarrity, chief investment officer. “As trade-detail access and analysis technology has evolved, so has our tracking of best execution.”
McGarrity said Colorado PERA has upgraded its internal transaction cost analysis (TCA) input, from custodian-based information to time-stamped trade data uploaded from the in-house order management system.
“This allows for more actionable information by matching actual trade decisions with contemporaneous benchmarks,” McGarrity said. “Along these same lines, PERA has moved from a more generic full day Volume Weighted Average Price trading benchmark, to more specific order-life or trade-life VWAP benchmarks. This timely data and precise benchmarking provides us with improved tools to assess trading decisions and broker quality.”
Colorado PERA monitors the performance of its trading relationships and refines its process based on those results; assesses broker-disclosed routing statistics and directs changes in venue routing as warranted; and scrutinizes routing information for potential new trading relationships, rejecting brokers who appear to utilize rebate-focused order routing.
“While MiFID II and other financial regulations have sharpened the market focus on best execution, our approach has evolved due to technological improvements rather than regulatory mandate,” McGarrity said.”That said, the increased emphasis on best execution will hopefully help improve the transaction cost analysis tools available to PERA and other market-participating firms.”
Overseeing best execution is a to-do item for buy-side firms, which may or may not have readily deployable resources to put to the task. But the secular shift also represents an opportunity.
“It’s something that the buy side has always wanted, but once you open up that box, there’s a responsibility that comes along with it,” Wald said. “You have to use the tools that are out there and not have your head in the sand. At the same time, it is imperative for brokers to have the means to demonstrate best execution.”
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