An increase in the quality of real-time execution benchmarking and transaction cost analysis (TCA) topped the July poll on theTRADEnews.com as most likely to improve buy-side execution monitoring and performance.
But voting was fairly even across a range options and with 33% of the votes it wasn't a clear winner.
In second place, voted for by 29% of respondents, was the standardisation of venue and broker post-trade reports. The lack of standards in both regulated market trade reports and OTC trade reports was acknowledged and addressed by the Federation of European Securities Exchanges and trade reporting venues in a series of announcements during July 2010.
With 25% of the voters choosing improved functionality of order management systems and execution management systems (EMS) as the best way to improve execution performance, perhaps the only clear conclusion was that different firms need different measures.
“Some buy-side firms are looking to add alpha for portfolios that depend on high-frequency trading strategies and arbitrage and where this is the case then real-time TCA is a must have,” says Paul Maxwell, head of front-office technology at asset manager Investec. “We employ a long-term investment bias which requires a greater focus on efficient and expedient trade execution, so we are happy that T+1 gives us the right level of frequency.”
For most buy-side firms, however, there appears to be a need for better gathering and reporting of data, historical and real-time, relating to execution.
A plethora of systems and sources are used across the investment management industry to provide information for measuring execution performance analysis.
But as they are built primarily to deliver orders or execution, with monitoring as a secondary function, there are often disconnects between the data needed and that which they supply. This can limit their effectiveness unless the gaps are bridged, usually though further technology investment.
Toby Bayliss, european head of portfolio and electronic trading at institutional broker Sanford C. Bernstein, says, “Historical analysis is an important tool in improving the quality of trading but must be carried out and utilised the right way. Conclusions are often drawn from too few orders or insufficient or inaccurate information that is supplied to the post-trade provider.”
But technology investment has to be seen to deliver a return. As this is not always evident, the industry is divided into ”haves' and ”have-nots' based on need. “The cost can only be justified if the information gathered is of sufficient quality to change trading styles or techniques which lead to improved performance,” says Bayliss. “Generally, only the largest buy-side firms maintain their own post-trade infrastructure, while others will rely on a third party or brokers to provide the analysis.”
What the poll did suggest is that buy-side traders can see where systems need improvement.
If a firm can realise its potential value, evaluating execution performance can become an integral part of its operations and pay dividends. Maxwell says he has integrated a transaction quality monitor, a TCA system by another name, into his firm's EMS to record trade data in detail to support use of tailored metrics for execution quality benchmarking purposes. “As a buy-side firm, the real-time element isn't so much of an issue for us, T+1 is sufficient as far as we're concerned, end of day or start of day and with the flexibility to configure automated reporting based on our traders, clients and regulatory needs,” he adds.
In the aggressive pursuit of alpha, there is no question of delay. One head of trading at a large buy-side firm says, “I don't see how you can trade without having dynamic TCA. We have traded self-directed for four to five years and everything has dynamic TCA.”
Looking ahead, the next level of analysis will, he said, be to identify the venues on which trades occur as part of TCA. This will determine that brokers are genuinely routing trades in the best interests of the buy-side client. “If you sit down with the broker to review their services, you need the information in front of you to ask decision changing questions” he says. “You need to be able to say this is what you cost and this is your ranking compared to your peers – then you have them on the spot.”