July 15, 2020

Improving Trading Performance with Collaborative Data

Published on Tabb Forum, July 2020

Outsourced trading firms can help solve a problem that has confronted asset managers for many years – that of quickly and easily evaluating broker performance by leveraging collaborative, anonymised data so that broker performance can be properly measured.

Faced with fee slashes, asset manager margins are at an all-time low. The optimisation of trading operations to improve performance seems a common-sense place to start to rectify this situation, with straight-forward appraisals required about the benefits of maintaining costly in-house dealing desks and whether extremely limited broker lists are truly justified.

To this end, heads of trading desks have long lauded the potential of using collaborative data to improve trade performance. But the nature of proprietary data sets and the risks of them becoming public have always thwarted any possibility of a buy-side collaboration in this area. Here, we examine how this considerable challenge can be solved.

Broker Reviews: Infrequent and Laborious

The appreciation of exactly how much money fund managers are spending with their brokers, let alone how well they are performing for their investors, is sadly lacking. An OpenGamma study published in September 2019 showed that “only 11% of fund managers      assess how all their brokers are actually performing despite having formal broker review processes in place.” Because of the laborious processes around reviewing broker relationships, firms are leaving themselves at risk of extra costs as they are unaware of exactly where and how much money is being spent.

What is most interesting to note, however, is that the majority of firms are reliant on manual processes to review broker relationships, with only 21% using live data in the review process. Smaller firms in particular are at risk of missing out on vital information. By way of example, if a firm wanted to trade French mid-cap stock but hadn’t traded one for three months, guesswork and human bias would end up being used to determine the executing broker because there would not be enough data at their fingertips to make an informed decision.

Automated routing decision processes

There is now, however, technology out there to help asset managers quickly and easily examine broker performance by taking advantage of collaborative data sets. BTON Financial, for instance, believes it is the only vendor that currently provides such a service through its outsourced dealing desk. This gives our firm the ability to anonymise and share non-proprietary, consolidated data sets whilst maintaining confidentiality and improving trading performance for individual users, something that would be cost prohibitive for many firms to do on their own.

By using an outsourced smart broker router with access to additional data sets, individual asset managers now have the ability to leverage anonymised data from across their peer group. Portfolio managers can check if a trade was executed at best price compared to all the other trading venues at exactly that moment in time.

Every trade can also be benchmarked with the ability to receive end-of-day reports broken down into various metrics including broker performance, trading venue and/or volatility, as well as the ability to examine outliers. Because data is anonymised and aggregated, benchmark performance by brokers can be measured on a much more accurate basis than if a firm were to do this independently. There is no risk of information leakage because the trading data is anonymised before the benchmarking process.

By applying an automated routing decision process to our French mid-cap stock example mentioned above, performance data of the brokers specialising in those trades gets passed on to asset managers to help them decide upon the best broker and execution algorithm to obtain better results for the trade. What is particularly interesting about an automated broker routing system, is that it provides full transparency of brokers, rebates, and in-depth TCA analysis on each and every order.

Controlling costs via outsourcing

Recent volatile markets have pushed investment managers into focusing more on controlling costs. A survey of asset managers conducted for Northern Trust by WBR Insights shows that 87% of respondents said their key strategic priority for the next two years will be controlling costs. One way of achieving this is to consider different outsourcing options to drive growth and strengthen key processes. We can see this reflected in the fact that 85% of respondents of the same study have either already outsourced their trading desk or are interested in doing so in the future.

Outsourced trading firms can help solve a problem that has confronted asset managers for many years – that of quickly and easily evaluating broker performance by leveraging collaborative, anonymised data so that broker performance can be properly measured. Asset managers can finally obtain true flexibility by integrating technology and capabilities to automate the broker routing process, thereby achieving best performance by having information at their fingertips to help ensure their success.

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