Dan Barnes Welcome to Trader TV, I’m Dan Barnes. Best execution and transaction cost analysis are more important than ever for equity traders in 2020. Mark Barnes, Director of electronic trading at Stifel Europe, will tell us why and how those traders are optimising execution performance today. Mark, welcome to Trader TV.
Mark Barnes Hi Dan, pleasure to be here.
Dan Barnes We’ve seen liquidity conditions return to a level which is more stable than it was in March, but it’s still not where it was pre-March. What does that mean for your client’s execution objectives and how you’re interacting with them?
Mark Barnes Going back to when things were perhaps more volatile, immediacy was key, and, you know, we’ve got a range of around 50 algos across five different providers, which gives them a wealth of choice, strategies and ways of transacting their business. With the strategies we have on offer we can sort of steer them in a more passive way because there are, you know, a number of passive strategies they can use that would work exceptionally well. I think where we come in and help is using those extra parameters to get the most out of those orders, so say for instance, you know, you may be more passive but there’s a certain level that the client wants to trade at or is more keen on, that looks right; you can put that parameter in there and get more aggressive. So, you know, you can start off passive, but when it’s favourable, you end up doing more percentage of your order. So, you know, it’s being able to react very quickly because tomorrow, you know, you could be very volatile all of a sudden – some news has come out – and there we are, you’ve got that choice of algos. Next day – quiet again – back to passive again, you know, so you can switch between all this and you can make passive algos not passive, as I was saying. And looking at our TCA on an intraday order-by-order basis, we’ll look and go: “hang on a minute, you should be switching to this algo because this will work really well for you,” or “you should be putting a portion of this in the darks and sitting there, just waiting for that liquidity and be passive in nature because I think you’re impacting price.”
Dan Barnes What sort of services and tools can your clients expect to see in order to help them analyse execution performance?
Mark Barnes We have our own pretrade analysis, which helps quickly highlight where to direct a client’s attention. We use in-house and third party intraday TCA to measure venue and trading performance to help make informative trading decisions on the fly. One of our products, Volume Profit, that really helps us and helps clients manage their orders in terms of, you know, we can predict quite accurately what percentage of volume they’re likely to be, and what the impact could be, so we can help them optimise, you know, how much they want to trade. Closing auctions, which are around about 30 percent of a day’s volume, can be often overlooked. We have a closed auction analysis to help manage this for clients. We ensure we know the structure of market closes, and that clients are using the best strategy to achieve their objective in the close, and also knowing the meaning of market orders fees synthetic limits that go into closing auctions; where you can kind of lose your, shall we say, place in the queue if you’re in a synthetic limit rather than a market. Our services can be implemented with minimal time delays. We provide clients with the latest algo upgrades, customisations. On orders clients can switch instantly with the same routed order into a completely different algo and vendor, and have just one ticket upon completion. Switching flexibility saves you time from the extra step you quite often have to have to sort of cancel an original routed order and then resubmit a new one. At the end of the day, you know, everybody wants to cut a step out if they can, especially trading in fast markets.
Dan Barnes What sort of metrics do people use for assessing how effective that execution’s been?
Mark Barnes You know, you need close integration of buy-side teams. You need to have easy, well-thought-out access to data and tools, and use this to focus on efforts achieving the best investment outcomes for clients. We benchmark trades and venues against various metrics, such as arrival, reversion, VWAP, and spread capture. We also look at how effective we are in meeting clients’ objectives, such as minimising any possible impact with dark trading. You need this monitoring and consistent approach of “Low Touch Plus” to succeed. Monitoring outcomes intraday contributed to a more positive result for the client. You need to turn TCA into an actionable event, such as venue selection or adopting strategies that enhance performance.
Dan Barnes Because there is that risk that TCA sort of becomes a metric which is slightly abstracted and isn’t used effectively to actually generate enhanced performance, isn’t there? So you actually help clients to engage in that.
Mark Barnes Yes, absolutely. It’s something we constantly are measuring different feedback on. For instance, we do a monthly report and just give clients advice on how to improve, what strategies to use, and give them a bit of detail. And they do react on it very, very often, and all of sudden they’re using a strategy they haven’t used before because we feel like we should be using this one because it’s performed well, you know, and that’s a great thing about us; we’re nonbiased, very consultative in our approach.
Dan Barnes Mark, that’s been great, thank you.
Mark Barnes And thank you, Dan.
Dan Barnes I’d like to thank Mark Barnes for his insights today and, of course, you for watching. To catch up on our other shows, go to tradertv.net and ETFTV.net.