Buy-side firms are finding new ways to gain greater transparency into broker algo performance as they seek more accurate execution analysis.
Speaking to Trader TV, Lucy Carter, reporter at Markets Media, discusses her recent story on how Baillie Gifford, a UK-based asset manager, and its execution team are using FIX Tag 527 to identify broker algos used during programme trades; and how they are cleaning the data and feeding it into third-party Transaction Cost Analysis (TCA) tools.
The piece explores the demand for standard data and scrutiny of broker performance and touches on whether in-house projects, like Baillie Gifford, are reflective of buy-side innovations in the industry.
For more information on this story and Lucy Carter’s reporting, go to globaltrading.net.
Interview
Josephine Gallagher – Welcome to Trader TV. I’m here, and I’m joined by Lucy Carter, one of my colleagues at Markets Media and a reporter at The Desk and Global Trading. We’re here, and we’re discussing the top story on Markets Media this week. Lucy, it’s lovely to have you join us.
Lucy Carter – It’s great to be here, Jo. Thanks for having me.
Josephine Gallagher – So for this segment, we are going to discuss your story about how buy sides are investing more in how to improve transparency in program trading and more accurately evaluating execution quality across broker algos. For the story, you spoke to the team at Baillie Gifford. For anybody who hasn’t read that story yet, what did you learn from your reporting?
Lucy Carter – Of course, yeah. So the first thing to sort of understand here is exactly what program trading is. So in a brief way, it’s a type of portfolio trading strategy where baskets of stocks with high value are all traded together, and often this has an electronic trading component to it, and these trades are sent from the buy side out to brokers, who then handle the execution using their own algo suites. So the interesting thing here is that lots of the time, the buy side doesn’t really know what the brokers are doing with those program trades. So they could be using different algos each time. They could be changing the algo strategies they’re using throughout a trade, and that information just isn’t shared back to the buy side, and that’s kind of where Baillie Gifford comes in. That’s where this conversation started. So what Baillie Gifford realized is that they could use FIX tag 527, which is actually used as a second execution identifier, to see which algos were being used at what times by those brokers. And this was sort of the innovation of Petros Kyliakoudis at Baillie Gifford, who realized that it could also be used for this purpose, and he sort of explained to us that using FIX tag 527 allowed him to see which algos were being used at which times by his brokers when sending out portfolio trades. So basically, what they’re doing is taking that data from 527, cleaning it, and sending it to their own third-party TCA providers, and from there they can get a much better picture of what’s actually happening to their trades.
Josephine Gallagher – Understood. So as per your story as well, there are a variety of different challenges that buy sides face in trying to accurately evaluate execution quality. Give us a little bit more detail about why that’s so difficult to achieve.
Lucy Carter – Absolutely. So, speaking to Baillie Gifford, one of the issues they had is that lots of their execution analysis was being done through brokers’ own TCA services, which brings up questions of is that more of a mark your own homework situation, where of course the brokers are going to want to present their products in the best light. And the second point is something that pretty much everything in this industry goes back to, and that’s data, whether it’s availability or quality. Here, one of the main issues I would say is that if everyone’s reporting different things, or even the same thing in different ways, it’s very difficult to get an objective view of what is actually happening and to get a real apples-to-apples comparison between brokers and their performances. So even things like FIX tags are voluntary. So if people aren’t using them, that information just isn’t going to get out there.
Josephine Gallagher – Understood. And have you seen any resistance from the likes of broker dealers or other market participants in the adoption of this tagging system, like 527?
Lucy Carter – So, according to Baillie Gifford, no. They say that the brokers they’re working with are very enthusiastic about the project. We did speak to one broker who has been with Baillie Gifford since the start on this, who really praised Kyliakoudis’ innovation and imagination with the use of this tag. And both the broker and Baillie Gifford explained that being able to get that information out there helps the brokers too because they are able to see how they perform against one another and how they rank for the buy-side clients that they’re serving. I also spoke to the FIX Trading Community, who obviously provide Tag 527, and they pointed out that this isn’t the original use for the tag. So while some are praising the innovation and imagination, they’re saying that this isn’t what the tag is meant to be used for. They have, in response to market demand, provided a new tag called, Last Algo ID, which is specifically designed to tell the buy side which algos are being used. But we’re not sure how much that is being used at the moment. But it seems like something the industry is definitely keen to get going with.
Josephine Gallagher – Okay, and so from other industry conversations that you’re having, are internal projects like these, such as Baillie Giffords, reflective of what other buy sides in the community are doing to better evaluate their execution and algo performance?
Lucy Carter – So I think lots of people are trying to find more creative ways to do more with the tools that they already have. There’s always a new way to use something that you already have access to, as can be seen with the 527 tag. So while Baillie Gifford says they’re the only ones using Tag 527 in this way at the moment, I’m sure there are lots of buy-side firms out there who have their own secret or more imaginative ways of measuring broker performance and ranking their brokers. And if anyone would like to get in touch and talk to me about that, please do.
Josephine Gallagher – Definitely, more to come. Then hopefully with more of your reporting. So to find out more about this specific story, Lucy, where can our audience find your reporting?
Lucy Carter – You can find the rest of this story at globaltrading.net. Please do get in touch if you have any comments.
Josephine Gallagher – Excellent. Thank you very much, Lucy. Thank you for joining us.
Lucy Carter – Thanks for having me, Jo.
Josephine Gallagher – I’d like to thank Lucy for her insight, and of course for watching, this has been Trader TV.
