Market data provider big xyt has launched its new portfolio liquidity analysis solution, developed in partnership with Baillie Gifford, to address dilution levy guidance impacting the buy-side.
The new solution provides buy-side firms with an independent view of the liquidity of equity portfolios by using market data.
A dilution levy is applied by investment managers as part of their cashflow management process of pooled vehicles to ensure clients are treated fairly while also mitigating the impact of price volatility resulting from cashflow activity.
The new portfolio liquidity analysis tool from big xyt, a subset of its Open TCA solution for execution analysis, can be beneficial when sourcing datasets, which must be harvested, harmonised and processed over time to provide estimates.
“Working on this solution in partnership with Baillie Gifford has provided a new turnkey solution for the buy-side,” said Mark Montgomery, head of strategy and business development at big xyt.
“It addresses the major challenges faced by investment managers when managing portfolio liquidity, and reduces operational risk and user error with a robust yet streamlined process that automates dilution charges on a daily basis, which saves teams significant research time that can be used elsewhere.”
The solution automates the dilution application process in a way that is data-driven for existing shareholders, alongside providing a quantitative view of the application of dilution charges.
If correctly applied, this can assist investment managers with minimising the impact of trading on a fund’s performance and apply test scenarios to determine the effect of conditions with increased volatility.
Trade data is utilised to calibrate the market impact estimates to improve the model fit and accuracy of the estimates, based on realised episodes of comparable flow types.
The market data model responds to shifts in market conditions, allowing for accurate pricing in line with market conditions.
Results are provided through interactive web-based dashboards in which bespoke views can be created to meet a range of industry needs.
“The partnership with big xyt was a collaboration between our trading and operations teams,” said Adam Conn, head of trading at Baillie Gifford.
“Our aim was to create a robust dilution adjustment and a threshold process for large deals, that is in the best interests of our clients, with high regulatory standards.”