Being able to switch between passive and active trading algorithms is crucial to best execution in markets which can suddenly become volatile. However, as trading conditions change, so too can best execution parameters. For buy-side traders, having access to execution tools must be matched with the right transaction cost analysis (TCA) tools.
Mark Barnes, director of electronic trading at Stifel Europe, outlines how actively trading in fast markets can be highly effective without losing efficiency when supported by a broker who can engage in advising on trading venues and new strategies.
Dan Barnes Welcome Trader TV, I’m Dan Barnes. Best execution and transaction cost analysis are more important than ever for equity traders in 2020. Mark Barnes, director of electronic trading at STIFEL Europe, will tell us why and how those traders are optimizing execution performance today. Mark, welcome to TV.
Mark Barnes Hi Dan, pleasure to be here.
Dan Barnes We’re seeing liquidity conditions return to a level which is more stable than it was in March, but are still not where it was pre-March. What does that mean for your clients’ execution objectives and how you’re interacting with them?
Mark Barnes Going back to when things were perhaps more volatile, immediacy was key, and we’ve got a range of around 50 algorithms across five different providers, which gives them a wealth of choice, strategies, and ways of transacting their business. With the strategies we have an offer, we can sort of steer them in a more passive way, because there are a number of passive strategies I can use that put exceptionally well. I think where we come in and help ease using those extra parameters to get the most out of that sort of say, for instance, you may be more passive, but there’s a certain level that the client wants a tradeout, or he’s more keen on, that looks right, you can put that parameter in and get more aggressive. You can start off passive, but when it’s favorable, you’d end up doing more of the percentage of your order. So, we need to react very quickly, because tomorrow could be very volatile all of a sudden. Some users come out and we’ve got that choice of algorithms. Next day, quiet again, back to passive; you can switch between all this and you can make passive algos, not passive, as I say. And looking at our TCA intraday order-by-order basis, we’ll look and go, ‘hang on a minute, you should be switching to SLK because this will work really well for you,’ or, ‘you should be putting a portion of this in the dark, instead of it just sitting there and just waiting for that liquidity, and be passive in nature because I think you’re impacting the price.’
Dan Barnes What sorts of services and tools can your clients expect to see in order to help them analyze execution performance?
Mark Barnes We have our own pre-trade analysis, which helps quickly highlight where to direct clients’ attention. We use inhouse and third-party, intraday TCA to measure venue and trading performance, to help make informative trading decisions on the fly. One of our products, Volume Profit, that really helps us and helps clients manage their orders in terms of how we can predict quite accurately what percentage of volume they’re likely to be, what the impact could be, so we can help them optimize how much they want to trade. So I’ve seen auctions, which are around about 30 percent of the volume can be often overlooked. We have a close auction analysis to help manage this for clients. We ensure we know the structure of market closes, and that the clients are using the best strategy to achieve their objective in the close, and also knowing the meaning of market orders fees’ synthetic limits, they’re going to close on auctions. You can kind of reassure a place in the queue, if you’re in a synthetic limit rather than a market. Our services can be implemented with minimal time delays. We provide clients with the latest algo upgrades, customizations. On all of this clients can switch instantly with the same routed order and to a completely different algo and vendor, so not just one ticket upon completion. Switching flexibility saves your time from the extra step you quite often have to have to cancel an original, routed order and then resubmit a new one. At the end of day, everybody wants to step out if they can, especially trading in fast markets.
Dan Barnes What sort of metrics do people use for assessing how effective that execution has been?
Mark Barnes You need close integration of buy-side teams. You need to have easy, well-thought-out access to data and tools and use this to focus on efforts achieving the best investment outcomes for clients. We benchmark trades and venues against various metrics, such as a rival reversion fee and spread capture. We also look at how effective we are in meeting clients’ objectives, such as minimizing any possible impacts with dark trading. You need this monitoring and consistent approach of low-touch plus to succeed, monitoring outcomes intraday contributed to a more positive result for the client. You need to turn TCA into an actual event such as venue selection or adopting strategies that enhance performance.
Dan Barnes Because there is that risk that TCA becomes a metric which is slightly abstracted and isn’t used effectively to actually generate enhanced performance isn’t there? So you actually help clients to engage in that?
Mark Barnes Yes, absolutely. It’s something we constantly are measure and getting feedback on. For instance, we do a monthly report and just give clients advice on how to improve what strategies to use and give them a bit of detail. And they do react on it, very, very often. And all of a sudden they’re using a strategy they haven’t used before, because we feel like we should be using this one because it’s performed well. That’s the great thing about us; we’re unbiased and very consultative in our approach.
Dan Barnes Mark, that’s been great, thank you.
Mark Barnes And thank you, Dan.
Dan Barnes I’d like to thank Mark Barnes for his insights today and of course you for watching. To catch up on our other shows, go to TraderTV.net and ETFTV.net.