Unreliable evidence?

Measurement of execution performance is largely ignored when asset owners assess the performance of their managers. Although heads of desk would welcome a better appreciation of the value execution can provide, unreliable data currently makes this a challenging task.
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When reviewing the performance of their asset management providers, pension fund trustees and other asset owners are inevitably drawn to the headline returns generated by individual ”star' fund managers. As execution is seen largely as a cost, the contribution of the trading desk to the alpha delivered by the investment guru is often just a footnote at best.

“If the manager hasn't beaten the benchmark, there's a debate about why not. But there's no debate about the transaction costs incurred in achieving that performance,” independent pension consultant John Ralfe told The TRADE last year.

It would be welcomed by many heads of trading if transaction costs were among the key criteria for the selection of investment managers. But there might also be a profound sense of unease, given holes in the data used to assess execution performance.

There are problems at source, i.e. the execution venues that provide trade confirmations of trades to executing brokers, and at both the broker and TCA (transaction cost analysis) provider levels, where raw execution data is benchmarked to lend context to the individual firm's trading performance.

Proliferation of venues can lead to variations in how trades are counted and reported. On top of the different methodologies used by competing venues, rival brokers will also take different approaches in measuring and presenting the trades they conduct on behalf of asset management clients. Inevitably, some brokers choose analysis techniques for their TCA offerings that present their trades in the best light.

Moreover, the benchmarks against which an individual asset manager's trades are judged are often incompletely compiled. Benchmarks may not be calculated using all available liquidity, for example. In Europe, where there is a lack of a consolidated tape, third-party TCA providers may base their performance analyses on data largely drawn from just the primary exchanges and the largest multilateral trading facilities. And those that wish to conduct real-time analysis must accept too that accuracy may be compromised by delayed reporting; MiFID currently permits up to three days for some trades.

While Europe may have the most intractable problems, quality of performance data is a global problem for the buy-side. The increasing volumes and sources of execution data are adding daily to the cost and effort required to come up with a truly accurate picture of trading performance that could help the end investor make a more informed choice. With so many holes to be filled, where should the industry start?

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