Brokers are beginning to embrace execution cost management (ECM) systems to quantify trade cost savings, says new research form TABB Group Execution Cost Management: Improving Margins, Strengthening Relationships.
Variable equity execution cost analysis has been overshadowed by transaction cost analysis (TCA) for several years, but by combining TCA, commission rates and variable trading costs, brokers say that they now realize they need to gain a more holistic analysis of servicing clients to improve the return on relationships.
According to Matt Simon, a TABB Group research analyst and author of the report, ECM includes variable costs execution fees, messaging charges and clearing and settlement, as well as fixed costs exchange memberships, hardware, bandwidth and support staff. However, determining execution costs associated with a trading desk, trader or client is difficult.
Reconciling monthly bills with some historical blended execution cost may work for brokers satisfied with the status quo, but to seize on the rare circumstances of todays markets requires a deep analysis of order flow. ECM requires an accurate and granular set of data as well as having the right tools in place to monitor trading decisions and track results.
Although many brokers are analyzing their variable execution costs most are only scratching the surface. Part of the problem is that execution venues disclose varying amounts of cost data to brokers, continues Simon.
The results is an inconsistent, untimely set of data that only lets brokers question figures that are clearly erroneous. Unless further regulatory stress is placed on the individual execution venues to provide more accurate execution cost data, these brokers are left with the messy business of assembling the data on their own.
Because maker-taker fees are the largest variable execution cost that a broker incurs on a daily basis, Simon explains that given the choice between venues, assuming that liquidity and pricing are equivalent, the decision on where to execute is still important. Using a hypothetical example, he says the cost savings from executing in the cheapest manner possible assuming the same price existed at all times in 2008 would have saved a broker 16% in maker-taker fees paid to lit venues. For the institutional brokerage sector, total savings would have been as high as $1.9 billion.
Although sourcing of liquidity overrules any and all financial incentives of a given execution venue, variable execution costs along with other pieces of key data demonstrate a commitment to execution quality as well as an opening to rate negotiation., says Adam Sussman, director of research, TABB.
Brokers that possess the details about where their orders were executed, how much liquidity was added or removed, when shares were routed to an alternative venue and which systems those orders were generated on will act as key components in future ECM discussions.
L.D.