The new buy side toolkit


From broker and algo wheels to alpha profiling and scorecards, best execution is changing rapidly and traders are enthused by the opportunities ahead.

Amidst rising costs, squeezed profit margins and onerous regulations, it might not seem the ideal time to be a buy-side trader, but in fact there may never have been a better time.

That was the optimistic feeling that emerged from a panel discussion hosted by Trade Informatics, Eze Software and Plato Partnership in London on March 20. With speakers from Liontrust, Barclays, Kepler Cheuvreux, Trade Informatics and Eze Software, it was agreed that the current trading and regulatory environment has created powerful opportunities for the buy side to improve performance and service provision.

Best execution is the driver of many of these opportunities. While the concept of delivering the best possible service to investors and portfolio managers has existed for decades, it is the regulatory push to evidence and prove best execution that is driving up standards across many trading desks.

The recast Markets in Financial Instruments Directive (MiFID II) raises the bar on best execution, requiring that all sufficient steps be taken to obtain the best possible result for the client. That has acted as a catalyst for European trading desks to review their processes and ensure their best execution methodology is properly defined and achieves the best possible result.

In many cases a more systematic, data-driven approach is now being taken, with widespread adoption of bracketing systems as well as broker scorecards and algo wheels. These mechanisms allow trading desks to group and grade their counterparties and algo strategies much more precisely, so that execution decisions can be made on the basis of robust and reliable data, rather than using more subjective qualitative criteria in isolation.

But broker and algo wheels should not be seen as a panacea, the panel warned, as they can create a misleading picture when used in isolation if the data that sits behind them is insufficient. And any wheel that does not connect to the full range of brokers or algos available in the market could legitimately be accused of a biased approach, which would not be in line with the quest for best execution.

With more data available to traders than ever before – as a result of both regulation and technological advances – the challenge is to gather together the data that is most relevant and turn it into insights that will materially improve execution. While a broker wheel might do that using one set of data – historical broker performance – it is only part of the picture. The most successful desks are those that can leverage data more holistically to inform their trading decisions.

But leveraging data to achieve better results on the trading desk is not only about wheels and scorecards. An intelligent approach to aligning execution strategies with the objectives of portfolio managers can also be a highly effective way of unlocking new opportunities and achieving better results.

The concept of alpha profiling, whereby historical data is used to map particular investment strategies to the most appropriate execution strategy, involves a deeper understanding of incoming orders than has often prevailed in the past. Such an approach is gaining favour among many buy-side firms as it can be proven to lead to better results for the portfolio manager.

With such a wide range of opportunities to improve the business they do and the service they provide, it is clear that buy-side trading desks will continue to evolve as the MiFID II era unfolds. Data and technology will be the key drivers of change, and there will inevitably be rising costs to contend with, but these changes have the potential to improve results for the end investor, which can’t be a bad thing.

This article is part of our MiFID II Best Execution Review series - read more here.


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