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ITG's Mobile App Measures Trading Costs on the Fly

ITG's Liquidity Metrics helps portfolio managers and traders to quickly understand trading costs on a daily basis by region and sector.

With the buzz around high-speed trading, dark pools, fragmentation and information leakage, it’s not surprising that institutional traders want to measure the cost of trading on any given day.

Last month, ITG released its first mobile trading cost application Liquidity Metrics and the first cost index, the ITG Cost Index, for measuring transaction costs each day that runs on smart phones and tablets. The application also displays quarterly historical data over a five-year period, including average commission and price impact history.

“One of the motivations for developing it came from clients who felt if they had some idea of trading what costs were day to day, it would enable conversations with the portfolio managers,” said Ian Domowitz, ITG managing director and head of analytics, in an interview.

This is aimed at all segments – asset managers as well as hedge funds. “It’s exactly the type of summary information that portfolio managers enjoy,” said Domowitz.

By looking at data on transactions costs tied to a cost index, institutions can gauge how their trades performed against the prior day’s results based on region market cap, or sector for buy or sell orders or all orders. Traders can also view costs as percentage of market daily volume. They can choose to look at trading costs in Asia-Pacific, Canada, Europe, U.S., or take the global view.

“The demand for what trading costs were, is from across the globe, by market capitalization, size of order and by sector on a day-to-day basis,” said Domowitz.

Essentially, a trader can click on ITG’s mobile app, chose a market sector such as financial or healthcare, basic materials, industrials, IT, telco, utilities, etc., and see how many basis points are either gained or lost based on a buy or sell or all trades. Traders can even look at large cap, mid-cap, small cap and micro cap stocks.

The daily ITG Trading Cost Index is based on actual trading data in the ITG Peer database, and is not based on any forecast, emphasized Domowitz. For example, a client could compare themselves to the top 50 clients (or top 20 clients) contributing data to the peer universe as measured by turnover globally (i.e., total value of stock traded) for that quarter. ITG’s Peer Database is comprised of historical institutional trading activity from more than 175 of the largest global buy-side institutions and covering approximately 20% of global institutional trading volume. The index is based on computing more than 100,000 daily orders around the globe. At any given time, it covers roughly 2,000 tickers.

“We’re taking yesterday’s data and combining it with some proprietary methodology and data from the ITG Peer database,” said Domowitz.

A Test Drive

As a case in point, last week the stock market had a bumpy ride as investors soured on momentum stocks and then ended with a sell off in technology and healthcare, reported CNN.

On Friday, April 11th, when all major U.S. stock indexes (Nasdaq, Dow Jones Industrial Average and S&P 500) declined that day, ITG Trading Cost Index calculated that the top 50 asset managers buying U.S. financials lost 9 basis points, while the same group selling financials lost 3 basis points. Across all trades, firms in the top 50 lost 9 basis points on Friday.

In the U.S., the top 50 asset managers (based on turnover globally) buying IT stocks, lost 14 basis points on Friday, while those selling only lost 7, and in general for all trading lost 10 basis points.

In Canada, top 50 asset managers buying IT stocks won 20 basis points, while someone selling IT stocks lost 46 basis points. On the other hand, all asset managers lost 4 basis points on buys, while they lost 11 on sell orders. Looked at by market capitalization, a top 50 asset manager buying large cap stocks lost 5 basis points on Friday, while those selling lost 12.

Buyers of mid cap stocks earned 20 basis points, gaining the most, while sellers of midcap stocks lost 37 points, losing the most.

Another way to view costs is to look at trades as percent of market data volume. For example, an order that was 1 to 5 percent of volume on Friday, gained 4 basis points on buys, and lost 16 basis points on sells. By contrast, a buy order that was 5 to 10% of volume, gained 2 basis points, while a sell order lost 27 basis points, according to ITG’s Liquidity Metrics. In terms of methodology, Liquidity Metrics is based on the straight implementation shortfall benchmark. “Given the nature of the analysis done by our client base, implementation shortfall is still the primary choice,” explained Domowitz. Implementation Shortfall is the difference between the decision price (of the portfolio manager) and the final execution price (including commissions, taxes, etc.) for a trade. This is also known as the "slippage" or the cost of a trade between the time when a portfolio managers sends an order to the trading desk and when the execution arrives back. In contrast to the volume-weighted price (VWAP) to gauge their performance, Domowitz said clients are interested in implementation shortfall. “That is where the money is won or lost in the trading process,” he explained. But traders don’t have to use implementation shortfall. For firms thaThey could also look at the trading costs incurred by the top 50 or top 20 clients.

Next Stop: FX

ITG is already working on approaching foreign exchange costs in the same way. “That’s really a great example where there is nothing known about costs to speak of in the aggregate,” said Domowitz of FX. He imagines making cost curves available for different times of day, size adjusted spreads and deviations from standard volatility patterns.

“You can imagine a calculator where you can compare $50 million of Polish zloty relative to the euro and get a measure of that,” he said. “That application even edits Twitter feeds that are peculiar to every currency pair and then makes that available,” said Domowitz. A mobile currency app could look at currency costs based on what the volatility conditions are for that currency pair and get Twitter chatter for a currency pair, and if calculators are needed, it will offer a calculator, he said. Domowitz said that a prototype for FX already exists.

As for the future of mobile in institutional finance, Domowitz said he doesn’t have a crystal ball, but sees it as a convenient way for clients to have information at their fingertips. That’s one reason that ITG is not charging for the cost index and is in fact, giving it away.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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