Brokers may or may not be routing client orders to reduce their own trading costs, but the real focus of buy-side ire at the TradeTech securities industry conference held in Paris this week was the transaction cost analysis (TCA) providers who are failing to provide the evidence to convict the accused.
“My suspicion is that some smart order routing (SOR) tools are not as smart as others, but I’d like to be able to prove it,” said Nigel Coleman, UK head of equity trading, Credit Suisse Asset Management, in a panel discussion entitled ‘Addressing the key concerns of the buy-side dealer in a changing world’. “I’d like to know whether a broker is using a particular venue because it suits them or because it suits me. Are they inappropriately routing my orders to the cheapest venue for the broker? There’s a gap in the market for policing SOR.”
Coleman also predicted that the buy-side faced a period of cold turkey as innovation and service levels from brokers and other providers diminished in accordance with the reduced level of available resources. “A lot of the problems of the buy-side stem from our dependency on the tools provided by the sell-side. We are now addicted to the infrastructure provided by the sell-side. It is now inevitable that spending on that infrastructure will plummet,” said Coleman.
He also blamed the tightening of belts across the finance sector for the lack of progress toward much-needed product innovations, such as a consolidated market data tape to provide buy-side traders with an aggregated view of European liquidity. “If MiFID had happened a year earlier, it would have been like the gold rush, with a lot of market participants and software vendors filling the gaps, but we’re feeling the pain because of the slowdown in technology spend,” Coleman observed.
Nevertheless, he called on providers of transaction cost analysis to provide more comprehensive market data and to broaden their product capabilities. “The TCA industry has had it easy for quite some time and providers now need to take their services to the next level,” he said. “I want to know how smart smart order routing is, but I can’t until TCA firms source data from alternative vendors. As yet, I don’t think any of them are.”
Klaus Timpel, global head of valuation control, DWS and Deutsche Asset Management, said that TCA must move beyond data collection issues if it is to help traders and portfolio managers to work together to minimise alpha leakage in the trading process. “It’s still a huge battle to get proper data, but we also need to develop intelligent models rather than lumping together a few data points. You need to create a benchmark that reflects the style of your trading and investment processes,” he said. “It’s hard for a trader to have a good result when your portfolio manager jumps of the cliff like a lemming.” Timpel called for TCA developed along more scientific lines to help put an end to arguments between portfolio managers and traders over the cause of poor trade performance.
Rather than providing an accurate indicator of the trader’s contribution to alpha generation, Coleman said that TCA most often identified outlying trades whose performance good or bad, depended almost exclusively on the input of the portfolio manager rather than the trader. “The use of TCA should be about saying to those individual portfolio managers: ‘Here’s the cost of trading in your style versus the cost of trading for the man sitting next to you with a separate approach to the market. Are you comfortable with that?’” he said.
Read this story in full plus more coverage of TradeTech 2009 in The TRADETech Daily in our publications section.