Trading performance analysis across assets will create welcome feedback for the trading team says Cathy Gibson, head of trading at Royal London Asset Management, but there are significant complexities in providing a meaningful picture for an asset manager. Appropriate performance benchmarks are very different, data availability is inconsistent and the technology used has to be flexible enough to account for these variations. Consequently the value of multi-asset analytics will depend upon the sophistication it can manage while providing a straightforward picture for all stakeholders.
Dan Barnes Welcome to Trader TV – your insight into the trading climate for professional investors. I’m Dan Barnes. Whichever asset you invest in, understanding how trading impacts the return on the strategy is invaluable. However, very different metrics can and should be applied to the execution of a trade in any given asset class to assess that performance. Cathy Gibson, head of trading at Royal London Asset Management, is with us to help us understand the measurement of best execution across asset classes. Cathy, welcome back to Trader TV.
Cathy Gibson Thank you, Dan.
Dan Barnes How does trading performance analysis differ in its measurement between FX, equities, and fixed income?
Cathy Gibson So, it differs considerably given the different benchmarks that you have across those sectors. It also differs in the amount of data that you have available for the analysis across those sectors, and within that it differs depending on the type of trading strategy that you’re implementing. For example, passive would be very different to an active strategy. Again, it will be different if you’re looking to build into a position over a slow period of time, or whether you’re trying to take risk off the table, and you need to be more aggressive in the market in those scenarios. So, the actual strategy around the execution is key to really trying to identify good trade performance analysis. Historically, we’ve had different companies and reports for each asset type, which makes it very, very difficult for compliance and for the business to actually provide real challenge to us on the trading desk. So, I’m a big fan of trying to putting together multi-asset, trade performance analysis, because it really allows people who are very familiar with the data and actually provide real challenge to me and my traders.
Dan Barnes What are the benchmarks used to measure those three asset classes?
Cathy Gibson So it’s going to be different whether you’re using a benchmark for equities, or whether you’re using fixings for FX, or whether you’re using some sort of composite price for fixed income.
Dan Barnes Some of the benchmarks people talk about with equities, volume weighted average price (VWAP), implementation shortfall, these are typically measures of execution over time. Why are those not necessarily appropriate for other asset classes?
Cathy Gibson Because you don’t have the same data available in all asset classes: fixed income tends to trade a lot more in block size rather than equity, which tends to work to a certain period of time or in line with a certain average daily volume.
Dan Barnes Who might be looking at the execution performance analysis?
Cathy Gibson So compliance look at execution performance analysis and they look for outliers, traits that appear to be underperforming are over performing. This is really key for us to meet our MiFID II requirements, and something that’s carried out, routinely, in investment management houses. However, for me, the most important thing about good trade performance analysis, is the ability to look and see where we could have improved so that we can constantly learn, and engage, and evolve our trading strategies, to ensure that over time we’re consistently getting the best possible price for our clients.
Dan Barnes That’s great. Thank you very much. And you mentioned that there can be gaps in data. Where are those gaps in data to support analysis?
Cathy Gibson So, the most obvious place is in the fixed income market, where it’s still an OTC market, it’s still very little transparency. Even post MiFID II, the transparency in corporate bonds, fx, has not improved at all. And we definitely have more room for improvement in that area.
Dan Barnes MiFID II is supposed to create more transparency. Do you think it has sort of achived that or not?
Cathy Gibson To the most part, no. Yes, there’s some very sophisticated FinTech companies out there who have the ability to go in and scoop up this information from the various different publishing houses, and collate it all and put it together, but the cost of consuming that data is very, very high and almost prohibitive in some cases.
Dan Barnes Okay. Now in the US, they have a consolidated tape for equities, and consolidated tape for fixed income, which provides low cost or free access to that data. How are European efforts in that respect progressing?
Cathy Gibson Slowly, with some traction. There has been a recent commissioned ESMA paper, where they’ve sought opinions on the creation of a consolidated tape in the equity space.
Dan Barnes Is there any reason they can’t run the development of an equity tape and the development of a fixed income type simultaneously?
Cathy Gibson No, no, I think they can definitely run it simultaneously. The sooner the better. And I think while equity is going to be an easier solve, fixed income is going to add the bigger improvement in transparency in the market. Not only will it increase transparency, which is what the regulator wants, it also helps if you look at the effect of the tape in trace, it’s helped ease bond movement prices. So, in Europe you see gappy prices, because there’s no transparency. So, bonds move more aggressively than they do in the US.
Dan Barnes Presumably, if one’s moves are priced, that could potentially affect investment performance, and therefore actually help investors in terms of their returns?
Cathy Gibson Absolutely, it will help investors in terms of their returns and particularly for small retail kinds of personal investors, it will allow them greater transparency on pricing and visibility, which is something that I think all market participants should be keen to see.
Dan Barnes Cathy, thank you very much.
Cathy Gibson Thank you, Dan.
Dan Barnes I’d like to thank Cathy Gibson of Royal London Asset Management and of course, you for watching. To catch our monthly reports on other markets, or to subscribe to our newsletter, go to TraderTV.NET or ETFTV.NET.
