Handle with care
a continued adverse trading environment it is doubly important my brokers achieve
the best results, but how do I get that across to them?
With liquidity thin on the ground, order
handling is of the utmost priority and when it comes to broker reviews, the
eject button will most certainly be pushed if a broker can’t explain how and
why an order has been traded.
This includes routing – how many venues was my order posted on before it was finally executed – and the performance of each execution across the markets used.
But it’s also about ensuring brokers are
earning their keep, in addition to knowing exactly how they have treated your order.
The one thing that will make buy-siders hot
under the collar is if a broker, when receiving an order they can’t immediately
fill, simply pops it into an algo to execute. Why should I pay fat commissions
to a full-service broker when I could have done the same thing myself?
what can institutional investors do about it?
Order handling issues need to be addressed by
the buy-side during quarterly broker reviews, lest they be taken for granted by
the sell-side. Buy-side desks that are unbundled will find it easier to be selective.
Most buy-side firms are focused on finding
the optimal balance between the numbers of full-service and execution-only brokers
they use. It is those in the middle – offering more
of an execution-only service at full-service prices – that are harder to
One buy-side global equities head in Asia
recently opened his books up to a number brokers outside his roster and asked
them to show how they would fit his orders into their flow. It was a unique way
of making the incumbents justify how orders are treated.
Are their any execution tools that will allow me to take order handling into my
A number of organisations have started to
think about how this can be done. Top of mind in Europe would be Simo Puhakka,
head of trading at Finland’s Pohjola Asset Management.
When he saw the market
impact costs of using brokers’ smart order routers (SORs), he wondered if an
independent solution could do better. And it did. He built his own SOR and is
now shopping it around to other like-minded buy-siders. He still trades with
investment banks and in dark pools, but only if he can understand both the
costs and the benefits and how his order is being handled.
well and good if you have the budget to build your own tools, but what about
those of us that can’t afford such expenditure?
Transparency is the name of the game. The
whole idea of smart order routing is to find liquidity at the right time and
minimise your market impact. Problem is, often the buy-side order doesn’t use
the broker’s SOR at all because it is being internalised in a sell-side dark
pool, sometimes not even at the best price.
Nowadays, a lot of firms are having their
SORs independently monitored for accuracy and this is one way you can get more
clarity from your broker.
Either way, if you don’t ask the question,
you’ll have less chance of really knowing how your order is being handled.
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