Best Execution Needs Data-Parsing System

By Glover, Hannah | American Banker, April 25, 2007 | Go to article overview

Best Execution Needs Data-Parsing System


Glover, Hannah, American Banker


Portfolio managers can buy all the algorithms they want, but ensuring best trade execution starts with investing in an order management system sophisticated enough to handle them, according to panelists at a forum on buy-side technology sponsored last week by Financial Markets World.

The problem is, though managers are quick to adopt programs that promise the fastest, cheapest trade, few have the tools to evaluate them accurately. This is because, as their strategies change, their software systems do not, and valuable, analyzable data is allowed to escape.

"I look at technology as something to help with the basics," said Bill Conlin, an executive vice president and the chief operating officer at Abel/Noser Corp., a New York brokerage that also offers trade-cost analysis to clients.

"If you can't analyze what it's doing for you, then you're really going to have a problem," he said.

In the hunt for alpha, portfolio managers are often eager to use tools like algorithms that promise them an edge, however narrow, in executing trades.

Fragmenting trades among brokers, and the increased use of options, futures, and derivatives, add to the complexity - and the frenetic pace.

Last, but certainly not least, are the regulations requiring fiduciaries to do it all in a way that most benefits the investor, not the broker or other interested parties.

"Wall Street is great, great, great at one thing: It's good at selling product," Mr. Conlin said. But not enough fund complexes are buying order management systems sophisticated enough to capture enough data for firms to do true trade-cost analysis, he said.

"It is very rare that I find a buy-side client who says, 'OK, this is my strategy. My trading volume has to have an alpha greater than this,' " said David Mortimer, a principal at Vodia Group, a consulting firm with headquarters in Concord, Mass. "Unless you can answer the tough questions, it leaves the rest of the process in the lurch," he said.

Even if each portfolio manager has his own system for analyzing trade cost when crafting the strategy for the fund or group of funds he oversees, fund companies have a hard time comparing strategies and trade costs between managers, or against peers.

"You can't even start to make this type of analysis until you have a system that can capture all the data to do it," Mr. Conlin said in a subsequent telephone interview.

One barrier is cost.

"On the buy side, there is a lack of appreciation o[f] the [research and development] I need to do," said Brett Ginter, the president and founder of Smart Consulting in Chatham, Mass. …

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