Capital Group’s Brian Lees is driving efforts to ask more questions of brokers, and for more data on where an order is shown before it executes, but can the buy-side handle the resulting deluge?
The current work you are doing on venue reporting analysis Our first push was simply to try to collect information about ‘where’ we were executing and a little bit about ‘how’ we were executing, namely, did we post or did we take liquidity. So having done that, the question was where do we go from there? And as such, the topic of requesting more data on where we didn’t execute and what order types were used started to be raised by some representatives on the FPL Americas Buy-Side Working Group. Some participants had already started down this road with brokers, asking for information relating to post-trade about where their orders were sprayed out to by the algorithms and what types of orders were placed on exchanges and also which exchanges they were on, etc. So that’s where the conversation began and that’s where we reached out to Jeff Alexander and Linda Giordano, because Barclays had already spearheaded this conversation.
What we are looking to achieve either in real time or post-trade, is whether we can standardise a format for brokers to tell us how our order interacted with the market, including when the order was placed, what order types were used, where it was placed in the markets and whether or not we got hits. The concern with this is not so much can we get it, because if we sign enough non-disclosure agreements we can get the information from the brokers. Some brokers have concerns about that information getting out and somebody reverse-engineering their algorithms, but from the buy-side perspective, I think the biggest concern is whether we can manage the volume of data that we would get.
The resources to store and analyse data and make some sort of good use of it With the original data that we were getting, on where the execution took place, we talked a lot about this with smaller firms who were using TCA vendors to help them analyse this information. With this type of information, if we went a step further, the brokers would not want us sending that out to TCA firms, because it shows their methodology for how their algorithms behave. I was in New York several weeks ago and took the opportunity to meet up with Jeff and Linda while we were there. We invited Jeff to join one of our conference calls for the buy-side committee, which he did, and he talked about what they’ve been proposing. He showed proposals for both the real-time collection of data, via FIX messages, actually proposing a whole new FIX message to be created for this purpose, which could then be sent in real time. Or, alternatively we could standardise a format for collecting the information post-trade which, as a spreadsheet, would then tell us what we want to see. We’re trying to standardise how you ask for the data and what format it is going to be in, by creating best practices for how to get the data from the brokers. That way the brokers don’t have to keep coming up with a different format for every client that asks for it. The best practices do specify that the ISO MIC codes would be the standard for identifying the exchange that you executed on, but we said nothing about what you should do with the data once you get it.
Exchange involvement in the conversation We did talk to some exchanges when we were first trying to standardise how to identify the exchanges, because when we first standardised the MIC codes, they did not cover all the exchanges, this was due to the fact that they hadn’t all registered with the ISO organisation and we wanted them to.
We had a little bit of trouble in differentiating the dark order books from the lit order books and some of the exchanges that have both. These exchanges consider themselves a hybrid book, and they didn’t want to be known as two different things. We didn’t have a way to differentiate the dark and the lit flow without introducing yet another FIX tag. That back and forth added to the conversation as part of the registration authority’s decision to come out with the new market segment concept, which says you can have an exchange defined and have child MIC codes that differentiate different segments of the market. We’re beginning to start conversations with exchanges about this topic, but that’s the extent to which we’ve had any discussion with them.
Broker willingness to participate in the process The first half of this, just getting the information about where you executed, the brokers didn’t have any problem, because it’s public record once it executes. When we started talking about the more detailed reporting, they did raise a concern about the information being sent out and NDAs so that, you, as a client, are not going to send the data out to a third party. But because other firms had already started down this road we talked about the purpose of this, which was just to have someone looking over their shoulder to make sure that they are acting in the best interest of the client and not potentially favouring rebates over best execution; they can’t really argue with that logic. Somebody should have some oversight as to whether or not the right decisions are being made.
Wellington Management’s Lee Saba and Capital Group’s Brian Lees and Bill Rosner discuss the FPL Americas Buy-side Working Group and its recent work on execution venue reporting.
FIX Protocol Ltd. (FPL) launched Buy-Side Working Groups in the Americas, EMEA and Asia Pacific regions in order to provide a platform for buy-side representatives to discuss how their needs can be efficiently met by the automated trading community. As an initial task the group prioritized their main concerns which resulted in a focus on the following areas:
Post-Trade - generating best practices for different allocation methods and creating a central repository for ‘best practices’ that users could leverage to standardize messaging in the post-trade space.
Test Symbology - providing the financial community with risk averse tools for production validation of complex trading and portfolio management systems.
Execution Venue - standardizing the reporting of the executing venue and creating a rules of engagement/best practices document.
The primary focus of the Execution Venue Initiative, listed above, has been to seek a more consistent response from the broker-dealer community with regards to broker reporting of the execution venue on each fill. As a result, the group has sought to standardize and expand the information received in trade reports from brokers by creating a best practices document to help resolve these challenges. The buy-side participants would like to encourage the sell-side community at large to implement these guidelines after consulting with their clients on the readiness of their systems.
Although some of the information being requested is not new and brokers have been supplying this data in their trade reports for some time, the type, amount and how information is sent from distinct brokers to the buy-side varies. Therefore, the information that is being requested as part of the guidelines will enable the buy-side traders to:
Increase awareness of where their orders are being filled as the market continues to fragment into dozens of dark and lit trading venues.
Better understand if the venues receiving their orders are the most desirable.
Enable money managers to determine whether or not the routing decisions of the brokers were made to the benefit of the broker or the client.
It is important to note that this initiative is not focused on any major changes to the FIX Protocol specification itself but the establishment of a set of best practices with a goal to lead to greater consistency and standardization among broker practices.
FIXGlobal: What was the genesis of this idea?
Bill Rosner, Manager of Application Development, The Capital Group Companies and FPL Execution Venue Working Group Co-Chair: The idea to do this particular effort stemmed from a survey that FPL held in early 2010. Buy-side firms were asked to rank the importance of various streams of work that we were preparing to undertake and the Execution Venue topic received a great deal of interest.
Lee Saba, Vice President, Wellington Management and FPL Buy Side Working Group Chairman: The execution venue concept is not a new idea but one the FPL Buy-Side Working Group felt could satisfy our trading desks’ demand for more transparency in the equity marketplace. As the Buy-Side Working Group was forming, we quickly realized we had many similar initiatives and decided to pursue them together. As a collection of buy-side firms we felt if we agreed in principal to an execution venue standard the dealers would have more reason to adopt the request.
Brian Lees, AVP, Manager of Application Development, The Capital Group Companies and FPL Execution Venue Working Group Co-chair: As the Buy-Side Working Group was discussing where to focus its initial efforts, this topic clearly struck a chord. As the equity market has become increasingly fragmented through the proliferation of electronic venues in recent years, it feels natural to begin asking for information about where and how our order flow is being executed.