The onus for achieving best execution no longer sits solely on the shoulders of sell-side traders, say asset managers who spoke at the 2010 Best Execution USA conference, hosted by WatersTechnology.
The job of tracking and confirming best execution is increasingly difficult in today’s market, as there are numerous broker models and direct execution capabilities across multiple venues. "It is not just monitoring the broker, but asset managers need to monitor the performance of the venues and the algorithms," says one asset manager.
"The variety of channels has made the job of tracking and validating best execution even more difficult. Even if there are fewer ‘high-touch' trades, the increased amount of algorithmic trading requires more intensive high-touch monitoring," says Craig Jensen, co-head of trading for Armstrong Shaw Associates.
However, some firms do not rely on transaction cost analysis (TCA) reports since the reports do not incorporate the difficulty of the trades, market velocity or "step outs," when asset managers split a trade across multiple brokers, explains Jensen.
"We use spreadsheets and generic benchmarks such as volume-weighted average price (VWAP). We don't use TCA reports," he says. "I look at what the market is doing at the time—we look for drop-offs, spikes and volume, not the absolute cost of any one set of executions."
"You must look at patterns over time," says Jason McLean, head of trading at Iridian Asset Management. "For example, I will give more difficult trades to an agency broker [versus a full service broker], so their score for implementation shortfall may look low, but given they have more difficult trades, they are really quite good."
Further complicating the transaction tracking is the increased use of commission sharing agreements (CSAs) that have opened the door to more trades flowing to the agency brokers who give high-quality executions.
"Now, agency brokers will slice off one penny and push it toward a soft basis, so I can get pure execution with help to get the resources I need," says McLean.
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