How can systematic execution frameworks improve consistency and reduce slippage across different market and
liquidity conditions?
Systematic execution frameworks reduce human bias and standardize trades of a similar nature. Market data helps to assess historical liquidity and execution, live axes, and expected price of execution.
These factors combined with a set of pre-defined rules can route the execution to the best source of liquidity and improve slippage. For similar market conditions, this will produce more consistent outcomes but during challenging environments, it is important to review these parameters and adjust, as necessary.
How are firms incorporating protocol and counterparty selection into rules-based execution strategies?
Firms are using rules-based strategies to assess protocol and counterparty selection by first assessing the size and liquidity of risk being executed. In EUR IG, most <€2 million tickets can trade via auto-execution.
For larger tickets, the assessment of sided liquidity becomes more prevalent, and rules can be created to adjust the dealer’s selection for different size buckets. For protocol selection, more granular pre-trade analysis is used to assess if the profile of risk can be executed as a package (list of portfolio trade) or individually.
Systematic effectiveness can be measured in multiple ways: number of trades requiring less human oversight, consistency of execution levels, and improvement of best execution. At Vanguard, we have increased our auto-execution ticket volume from 45% to 70%, freeing up trader time to focus on higher touch execution.
In terms of what matters most, price improvement and best execution are paramount. However, making sure parameters don’t unintentionally introduce risks to the process is just as important.
As rules-based execution becomes more sophisticated, where does trader judgement continue to add the most value?
Trader judgement is pertinent at start of the process – assessing what needs executing, what the market conditions are and what the primary objective is.
Trading €800 million of credit in blocks of €10 to 20 million is very different from trading €100 million of €1 to 2 million clips in a volatile, risk-off environment. Market experience steers that judgement and whether the focus is on trade cost, guaranteed execution, or minimal market impact.
Rules follow on from that judgement by considering line size, number of dealers to include and best protocol. There is now a wealth of data available to help inform these decisions.