R&C: Could you provide an overview of how firms trading equities are currently managing their best execution obligation? In general, is there room for improvement?

Renz Hotz: While we still have a number of firms looking at best execution as a quarterly operation to be done with a lengthy report in hand, the majority are embracing a more process-driven approach. This typically starts with the definition of an order execution policy (OEP), usually grounded in analysis of the firm’s flow over a period of time – ideally one year or more – and a solid understanding of the objectives of funds and their trading patterns. The OEP is then implemented using an exceptions-based workflow that monitors the firm’s flow and raises any deviations from the OEP as actionable tickets. Typically, this is substantiated with periodical reports demonstrating the OEP and the evolution of the parameters of the OEP. There is lots of room for improvement; mainly, how to utilise the insights that transaction cost analysis (TCA) data offers – both from the order flow and the exceptions workflow – to improve decision making at point of trade. While generic TCA models are helping, the ideal scenario is to support trading decisions using insights gained and lessons learned from one’s own order flow – and only when necessary from a set of peer universe analysis. This should also form the basis of the next steps in order flow automation – away from just a round robin broker wheel.

Jul-Sep 2019 Issue

Bloomberg L.P.