Looking Deeper into Trade Execution03.30.2016
Buy-side traders are looking further into their trade data, all the way into the individual ‘child’ order executions, aiming to optimize their trading strategies in real time.
Whether they like it or not, today’s traders are long data. The quantity — and the granularity — of information about their executions expands with each year, and data management consumes more of their time. Transaction Cost Analysis has been de rigueur in equities for years; the latest advance is Execution Analysis.
ITG’s Ian Domowitz told Markets Media that in order to achieve best execution before the ‘parent’ trade is completed, more granular data was being requested. The buy side, he said, wants to know as its child orders are being executed, if a trading strategy could be modified as close to real-time as possible.
“Uncertainty has driven some participants to take best execution to mean simply best price, and execution analysis tends to encourage this, because prices are almost the only things really moving at millisecond intervals,” Domowitz explained. But best price at the fill level is not the same as best execution, he added, as best execution entails the best outcome under the circumstances surrounding the particular order or investment decision.
“In my view, the world of TCA is rather broad,” Domowitz said. “It expands rapidly and feeds into broad applications like fund capacity, liquidation studies and even net-asset-value valuations. EA, in contrast, is more narrow and exposes the core issues in a day-to-day trading strategy and paves the way for real-time decision support. Execution analysis, through more detailed data, looks at how the trader’s point of view should evolve.”
So while TCA looks at the macro cost of a trade, EA goes one step further — looking at micro trade cost and suggesting ways to improve the trader’s strategy, Domowitz added. Traditional TCA is based on data inputs such as orders and allocations while EA includes data such as color from individual child trades and makes a conclusion over these child trades. In essence EA becomes valuable in that it can change criteria for judging and sorting data, depending on real-time trade results.
“We’ve been doing this execution transparency for quite some time but now what we’re trying to do is respond to the buy side’s need and request for an interactive tool they can look at quickly and easily,” Domowitz said. “Our goal is to hand a buy-side trader a simple list with a few suggestions that is easy to look at rather than hand them a 150-page report filled with data.”
With a simple list, highlighting a few actionable ideas, allows the buy-side trader to maximize his efficiency and focus on trading, Domowitz added. Armed with a few choices and right on his desktop, the trader can then adjust strategies, routing and execution at the broker of his choice.
ITG’s EA is conducted on a broker neutral basis and examines approximately 1200 algorithms and their respective operational parameters, creating a peer universe of level data. The buy-side trader, based on his own mandate, can use EA as often or little as he likes, but Domowitz said it is most useful when used real-time.
“Some trading desks want the EA data in real-time, right on their desktop,” he said. “Others though want daily summaries while others still want a weekly report or even quarterly reports. But as you move out the time curve EA looks more like traditional TCA. The whole point is to get that real-time support.”
As far as what buy-siders are looking for in their EA, Domowitz said traders ask most often for reports about unusual trading results, or outliers. The question of how to use these outliers, he added, can be settled in an entirely different fashion via EA and without the blizzard of numbers TCA provides. The trading strategy itself is the real object of analysis, not the individual outlier trades.
“There are huge differences in strategies across various market conditions in day-to-day operations,” Domowitz said. “This is a day-to-day tool for best strategy that looks at the trading experience all the way down to every single execution looking at all strategies based on the past.”
Feature image by Kurhan/Dollar Photo Club
With Dmitry Kay, Co-head of EM FX Trading, Europe, UBS
Lynn Strongin Dodds looks at why independent research providers (IRP) have not gained the foothold expected af...
The service covers over 2 million liquid and less liquid fixed income instruments.
The US firm is expanding its European equity execution business.
The bank allegedly routed orders to its SuperX ATS despite lower fill rates.