With a continued adverse trading environment it is doubly important my brokers achieve the best results, but how do I get that across to them?
With liquidity thin on the ground, order handling is of the utmost priority and when it comes to broker reviews, the eject button will most certainly be pushed if a broker can’t explain how and why an order has been traded.
This includes routing – how many venues was my order posted on before it was finally executed – and the performance of each execution across the markets used.
But it’s also about ensuring brokers are earning their keep, in addition to knowing exactly how they have treated your order.
The one thing that will make buy-siders hot under the collar is if a broker, when receiving an order they can’t immediately fill, simply pops it into an algo to execute. Why should I pay fat commissions to a full-service broker when I could have done the same thing myself?
So what can institutional investors do about it?
Order handling issues need to be addressed by the buy-side during quarterly broker reviews, lest they be taken for granted by the sell-side. Buy-side desks that are unbundled will find it easier to be selective.
Most buy-side firms are focused on finding the optimal balance between the numbers of full-service and execution-only brokers they use. It is those in the middle – offering more of an execution-only service at full-service prices – that are harder to justify.
One buy-side global equities head in Asia recently opened his books up to a number brokers outside his roster and asked them to show how they would fit his orders into their flow. It was a unique way of making the incumbents justify how orders are treated.
Are their any execution tools that will allow me to take order handling into my own hands?
A number of organisations have started to think about how this can be done. Top of mind in Europe would be Simo Puhakka, head of trading at Finland’s Pohjola Asset Management.
When he saw the market impact costs of using brokers’ smart order routers (SORs), he wondered if an independent solution could do better. And it did. He built his own SOR and is now shopping it around to other like-minded buy-siders. He still trades with investment banks and in dark pools, but only if he can understand both the costs and the benefits and how his order is being handled.
All well and good if you have the budget to build your own tools, but what about those of us that can’t afford such expenditure?
Transparency is the name of the game. The whole idea of smart order routing is to find liquidity at the right time and minimise your market impact. Problem is, often the buy-side order doesn’t use the broker’s SOR at all because it is being internalised in a sell-side dark pool, sometimes not even at the best price.
Nowadays, a lot of firms are having their SORs independently monitored for accuracy and this is one way you can get more clarity from your broker.
Either way, if you don’t ask the question, you’ll have less chance of really knowing how your order is being handled.