Execution is a process not an event. The challenge in evaluating a trader's execution performance is in gathering accurate data from across that process and analysing it in a way that is meaningful in the larger context of the trading decision. This requires flexible and highly interconnected technology.
Execution and order management systems started life as very different beasts. But whether you, as a buy-side trader, now use an EMS and an OMS together or an amalgam of the two – the OEMS – you need timely and accurate data. Measuring and improving your execution performance depends on it. The current EMS and OMS tools do not always come up to scratch.
Although opinions vary the OMS is generally agreed to be more a workflow tool, the outputs of which reflect the consolidated orders of a firm. The EMS is connected – via a broker – to an exchange's order book and so by contrast is a real-time provider of execution benchmarks. Each gathers different information over different periods. Combined, that information can shed light on execution performance. But as neither system provides that combination as a function this is a point of potential weakness.
Prior even to putting the data together it must be of sufficient quality. The functionality that each type of system provides is not necessarily optimal for analysing the transactions they facilitate. For example, an OMS may not allow recording of the venue on which a trade occurred. Post-MiFID, this is a vital piece of data for analysis of execution performance in Europe. Capturing as broad a data picture as possible allows the analysis provided to be granular.
Information must flow as smoothly as possible between systems or the transfer itself can cause delays, which in turn affect the measurement of performance. If it is difficult getting data between an EMS and an OMS and performance is benchmarked against an implementation shortfall, the transfer itself may result in slippage. Integration between vendor provided systems using relatively standardised technology, such as the Financial Information eXchange Protocol, is a must, to facilitate transfer.
If a firm has not had a technology refresh in the last couple of years, it can find itself falling well behind the efficiency levels of most up-to-date asset managers.
Taking account of more pre- and post-trade pricing information over a longer time period will also enable a better measure of returns for the underlying client.
Execution is not a process in isolation. It should also be considered part of a larger picture. To reflect this the price map against which performance is measured should not simply take in the period from the point of execution to the order reaching a broker.
Instead, by capturing price data one month, one week and one day prior to the trade, followed by a measure of one month and three months, the systems will provide a better picture of execution performance in the broader context.
The chief investment officer needs to know if it was worth the decision to trade the stock in the first place, or whether it had moved 5% before the trade happened, something a one day picture does not fully capture.
A high market impact can be potentially be justified by the net returns over a month. Joined up, big picture systems provide net returns.
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