Careers

01:05 PM
Greg MacSweeney
Greg MacSweeney
Commentary
Connect Directly
Facebook
Google+
LinkedIn
Twitter
RSS
E-Mail
50%
50%

Gaining Trade Order Transparency Can Be Costly

The buy side is always looking for more transparency from their brokers, but gaining a view into the trading process requires an investment in technology and data experts.

Since the dawn of time, or at least since the Buttonwood Agreement, investors have questioned their brokers' trading methods. Traders frequently speculate about misrouted orders, information leakage and even front running. But with limited transparency into the trading process once the order leaves the buy-side desk, the talk rarely amounts to more than typical trading banter.


What Lies BeneathThe January/February 2013 digital issue of Advanced Trading takes an in-depth look at how buy-side firms are using more granular data to track their orders and get more insight into the trading process. To read more, check out Advanced Trading's January/February 2013 digital issue.

One of the most common causes of these suspicions is a lack of transparency into the execution process. Once an order reaches the broker, it can go in a hundred different directions, since the U.S. markets have numerous lit exchanges and 40 or more dark pools. Finding out how many destinations an order passes through before it's executed was almost impossible, until recently.

Today traders are demanding more transparency from their brokers. Faced with a marketplace where profits are elusive, institutions are looking for any advantage they can get to improve returns for investors. Now traders can access data about the entire route an order has taken, and many buy-side institutions are requesting this data from their brokers. However, there's still quite a gap between simply having access to the data and being able to do something with it.

[The Risk and Transparency Tango]

A specific message standard used by the buy and sell sides to transmit their orders, known as Tag 30, contains information that can help traders better determine which brokers are providing the best execution. But the challenge with Tag 30 is that the data collected piles up quickly. A trader or portfolio manager who's adept at data analysis should be able to view a single order and how well, or poorly, it was executed. It takes some time and digging, but it can be done.

However, if an institution wants to collectively analyze trade data for anomalies, best practices and best execution, more robust technology is needed. Tag 30 data for even a medium-sized asset manager would add up fast, since each transaction might visit six or seven trading venues before it finally finds the other side of the trade. Looking for trends in this amount of data will require not only the databases, analytics engines and other tools to sort the information, but also individuals with data-crunching expertise, such as quantitative data analysts and data scientists. As the Harvard Business Review notes, data scientists hold the "sexiest job in the 21st century."

To really gain some transparency into trade routing, buy-side firms must invest in technology and personnel that can leverage the Tag 30 data. This is easier said than done at a time when all companies are closely monitoring expenses.

Would an investment in data analytics help improve trade routing transparency, and will it provide financial benefits to the trading desk? The jury is still out on this, but some asset managers are already reporting success with analyzing Tag 30 data. While some asset managers may not be ready to take the plunge into increasing technology expenditures and hiring expensive data scientists, others feel that it's worth the cost to help improve returns. Only time will tell.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
Greg MacSweeney
50%
50%
Greg MacSweeney,
User Rank: Apprentice
2/20/2013 | 8:50:13 PM
re: Gaining Trade Order Transparency Can Be Costly
Good point. I think finding a hosted solution, or an off the shelf product, is something that most buy side orgs would prefer...especially the smaller to mid-size shops. Who do you think are are the leaders? TradingScreen, Streambase, maybe Portware?
More Commentary
Driving Information Security, From Silicon Valley to Detroit
As software interacts with more and more of our daily lives, technology providers may be liable for more damages than they have in the recent past.
Big Data's Challenge: Matching Business Needs With Technology
All those bits and bytes only add up to something when they’re organized, arranged, and made coherent.
Single Source, Many Truths
If the data quality is not at fault, why then might departments reject the data? The answer is that there are two aspects to data quality: factual correctness and contextual correctness.
Predictions Come True as Regulators Swoop
While two out of the five capital markets predictions from July have already come true, let's hope that all five don't actually happen.
IBOR Before It Was "IBOR"
While its catchy new nomenclature and explosion in popularity has given the outside world an impression that it is novel, the same conversations about it were happening twenty years ago. So why then is IBOR the latest buzz word for firms today?
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.