The potential to optimize execution quality through collaboration can be realized by leveraging the right technology
Buy-side traders today have an unprecedented opportunity to monitor order execution in real time, and to work with their brokers to adjust trading strategy and order routing to take advantage of liquidity and minimize transaction costs. This type of interaction requires innovative analytical and order routing tools that provide the level of transparency and control needed to do this effectively – and to achieve best ex. Simply put, the level of execution quality that can be achieved by traders is directly correlated to the capabilities of the platform their brokers use.
Like many aspects of the institutional trading world and the strategies deployed within it, there is a movement afoot to view things in an interconnected way. It is now recognized that trading and investment strategies, and the tools used to execute them, must be holistically chosen and deployed.
If the objective is to seize opportunities around liquidity and minimize transaction costs, an algorithmic management system (AMS) that combines all of the necessary innovative tools is a must for today’s institutional market participants.
“All of these things go hand in hand,” says Joe Wald, CEO and Founder of Clearpool, a provider of holistic electronic trading solutions. “If you have a platform that allows you look in real time at a host of different metrics that give you a view of what’s happening from a fill-rate standpoint, from a latency standpoint, from a reversion standpoint, and the same platform allows you to take that information and implement it into a new execution protocol for a particular strategy, that’s a critical advantage.”
With a platform that gives you the ability to configure routing protocols and adjust them on the fly, buy-side traders and their brokers can use historical venue analysis data to validate their optimal routing table, but retain flexibility to adapt to changes as they occur in real time.
The combination of real-time and historical routing analysis that Wald references is clearly not traditional transaction cost analysis (TCA). This is modern usage of holistic trading tools (AMS and Venue Analysis) at a microstructural level. At this level, he says, “You’re looking at at a number of different ways that order types and venues are measured. And you’re not looking only at your own flows, but you’re seeing a statistically significant peer data set to compare performance.”
“The holistic offering is critical in terms of being able to get this level of execution quality,” says Wald. “You must have a quantitative rational behind what you’re doing, not only to compete but to comply with regulatory mandates in today’s environment.”
The data balancing act
Real-time data is powerful to be sure, but longer-term historical data is valuable as well, and shouldn’t be disregarded. In fact, it’s a key in making good decisions and avoiding kneejerk reactions. It’s all about striking the proper balance.
“A holistic platform allows you to use real-time and long-term data in conjunction with each other,” says Wald. An example of incorporating historical data into real-time analysis is a scenario where a set of alternative trading systems (ATSs) have liquidity characteristics unique enough to be included in a routing protocol. On a particular day, there may be more liquidity in one versus the others, which is when buy side and sell side partners using the same technology platform can engage in real time to shift orders to where they’re seeing more fills getting done.
“That’s a moment where you have a tool and a platform that allows a level of collaboration to achieve things right then, while at the same time looking at it holistically,” says Wald. “You can say, ‘I'm not seeing the same behavior the next day or the next day, so maybe we shouldn’t change the protocol in the long run. Or, since we’re seeing some new information, let’s carve off 20 percent of the flow to go through new protocol and run an A/B test against the original protocol, and then we’ll see what happens over a period of time.”
A/B testing is one example of functionality available in the AMS that provides an opportunity for collaboration. Such collaboration, enabled only by technology, is creating a customer experience that the buy side has hoped for over a long period of time, and can provide sell-side firms with a genuine differentiator.
“Ultimately, firms are empowered by the adoption of real-time analytics, full control over the routing protocol, and historical analytics on a venue level, and they can really start to stand out,” says Wald. “And the beauty of this next generation of technology is it’s not all buried in spreadsheets and formulas. It’s in easy, intuitive, visual formats where you’re looking at heat maps, and pie, bubble, and bar charts. These are all things sell-side brokers are familiar with, but they are populated with data they’ve never had a chance to see in such a visual way. They’ve just never had access to it before, and with it they can better service their buy-side clients.”