Venue & Order Routing Analytics to Boost Transparency in Fragmented Market
Buy-side firms can rapidly execute an order in the stock market through a maze of exchanges and dark pools, but figuring out how many venues that order touched on its way to its final destination remains a mystery for some traders.
On Wednesday, Tabb Group, a capital markets research and consulting firm, launched Clarity, a market trading venue and routing analytics service to help standardize, collect, and analyze execution information and data from all major brokers. Tabb said the brokers are not receiving financial incentives.
Bloomberg Tradebook, Cowen & Co., Sanford Bernstein, and Weeden & Co. have signed on to help build the product and develop a consistent framework for analyzing execution data. Serving on an advisory board, the brokers are working closely with seven major investment management firms, whose names were not disclosed. They are also working with executives at Tabb Metrics, a new data-driven division at the firm.
"In today's fragmented US equities market with 54 trading venues, it is difficult for institutional investors to gain a clear understanding of how their orders are executed," Larry Tabb, founder and CEO of Tabb Group, said in a press release. Where and how orders are shopped affect information leakage, opportunity cost, and execution quality.
Also Wednesday, the market structure analysis firm KOR Trading unveiled its Best Execution Accreditation service for the buy side. On its website, KOR said that best execution has been a vague concept, though regulators could implement changes that demand a more quantitative, systematic approach to best execution. Its approach combines quantitative order flow analysis with qualitativeevaluation of policies, procedures, order routing decisions, and venue quality.
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Brokers say that, with dark pools under more regulatory scrutiny, buy side firms are very interested in order handling and order routing practices.
"We're getting an extreme amount of inquiries from our clients for routing processes and execution data," said John Cosenza, co-head of electronic trading at Cowen & Co. Concerns about navigating complexity in the market structure have been exacerbated by headlines starting with "Flash Boys" and continuing with dark pools and the New York attorney general.
"There's a lot of focus on why you route an order to an execution venue and on normalizing the process of routing," Cosenza said. "A lot of systems now capture where you actually executed the order. The challenging part is where did you route orders that didn't get execution. When you get one, was it the result of venue A, or was it that you routed to venue B?" Tabb's service "is going to provide detailed information on where orders and are routed and where orders are getting executed."
Most of the brokers who operate their own electronic trading desks have a core competency in putting together their own execution data, template, and formulas. "That is not complex for the top 20 brokers that have their own trading groups," he said. "Each provider has a template that looks a little bit different, the stats are a little bit different, so if you are a buy side firm getting all this information from different brokers, it's hard to get anything meaningful."
Consistent format needed
In his company's release, Tabb described the problem this way: "Investors are increasingly requesting execution and routing information from their execution partners but most buy-side firms lack the expertise to know exactly what to ask for, how to analyze the massive stream of information and more importantly, how to interpret the results."
There is no standard format or methodology, and piecing it all together presents a big data problem for those on the buy side. "The main point of this is to have a third party doing it, instead of the broker giving their own data," Cosenza said. He noted that Tabb Group is an independent source of data to the buy side. "Managing the data, capturing the data, creating a consistent format for all the brokers, using the same format, and using the same template -- that is the value in an independent third party analyzing the data."
Ray Tierney, CEO of Bloomberg Tradebook, said in the Tabb Group release:
Tabb Group is addressing the growing desire for more transparency around execution quality and routing practices in the US equities market. Tradebook decided to sign-on to Tabb's Clarity Advisory Board because it complements our ongoing effort to be more transparent and enables us to help drive change in our industry.
In an email response to questions, Tierney wrote: "We fundamentally believe that transparency breeds trust, and we need more of both in the industry." Tradebook has discussed the need for routing analytics with the buy side for several years, and this led to the development of Bloomberg Tradebook's venue and transparency report -- a quantitative approach to showing clients how the firm handles orders.
"More recently, there has been more interest in an independent, consistent and objective set of standard for TCA [transaction cost analysis] research, venue analysis and order routing," Tierney said in the email. "It takes a tremendous amount of resources to collect execution and routing information, filter it, put this data into context, and create metrics around it. The Clarity helps all clients with this process." Even though Tradebook has invested in this quantitative infrastructure, "Clarity will provide the buy-side with an independent, consistent and objective set of standards, for all of their orders rather than just the Tradebook subset."
In terms of how Clarity will work, Cosenza said Tabb Group is responsible for developing the consistent framework, specifications, and template with input from the advisory board. The brokers will provide the data to Tabb Group, whose job is to process it, normalize it for the all the brokers, and present it to the customers.
Another reason the execution data and order routing analytics is necessary is that traditional TCA metrics "are insufficient to determine the true costs of trading," Tabb said in his company's release.
Cosenza said traditional TCA had a lot of focus on the broker's performance vs. benchmarks. The focus of TCA is more on how the broker performed relative to arrival prices, VWAP, and implementation shortfall. Clarity "gives more of a granular look into the routing and execution decisions."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