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Buy-side on Execution Venue Reporting: Untangling Trade Reports

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.

FIXGlobal: How will this additional information improve traders’ decision making capabilities and will the offset in broker workload be commensurate?
Bill Rosner: In general, the buy-side traders are going to have better visibility into how and where their orders trade. With that comes the ability to make better decisions about when, where and how they place orders. A large percentage of the flow that we send through brokers today should contain this information; the working group surveyed many brokers and each said that the information is largely available. So it seems the buy-side hasn’t done a good job of communicating its wishes to the brokers and requesting this information in a readily consumable format. In the end, that was the goal of this group. We want to be sensitive to the capabilities of the sell-side while working with them to  develop a consistent approach toward meeting our goals.
Lee Saba: I believe there are two major improvements by standardizing the execution reporting. The first is real time analytics per FIX placement provided to our traders. The more information we can provide real-time to our traders, the better the execution quality for our clients. Secondly, we can provide a more detailed historical experience for our execution quality analysts from last market, liquidity indicators and capacity standardization. In regard to your workload question, the feedback from the broker community has been very positive for the Execution Venue Initiative and the creation of the Buy-Side Working Group. The dealers can hopefully realize cost savings by no longer needing to build custom interfaces for each client if the buy-side agrees on the basic framework. It works both ways – we get our initiatives completed and the sell-side saves by building it once.
Brian Lees: The transparency provided by this information allows the buy-side to keep its finger on the pulse of its orders in real time and enriches trade data. This should also create opportunities for additional post-trade analysis. For the broker, the ability to deliver this information in a consistent manner should reduce the proliferation of client-specific data translation requests that are costly to maintain. We therefore see this as a win-win situation.
FIXGlobal: Where do you anticipate hurdles in achieving adoption for the Execution Venue best practices?
Bill Rosner: We believe the biggest hurdle will be making sure each execution venue, without exception, is represented by an ISO Market Identifier Code (MIC). This is particularly important where dark pools, especially those run by the sell-sides, come into play. That’s where visibility gets murky. The Execution Venue Working Group is committed to reducing these gaps in visibility by consistently screening the data we receive and providing feedback to the sell-side community.
Lee Saba: One major hurdle is having all execution venues listed with the ISO MIC standard. Through our analysis we found active execution venues that have yet to register a MIC. Some venues have lit and dark books and we would like to know exactly where we printed. At a later date we may define FIX workflows for all non-ISO executions but we’ll save that for the future. One last thought, before receiving the new execution data, I highly recommend testing with your counterparty as there will be some work to calibrate their systems to handle the new FIX tags.
Brian Lees: The biggest hurdle is likely to be achieving a high percentage of ISO MIC registration among the venues that are out there, and doing so in a way that distinguishes between dark and lit books. In general we anticipate that once this information starts to be collected in earnest, some adjustments will be necessary to iron out any wrinkles that develop. One area of uncertainty is whether this information will be consistently provided in situations where one venue routes out to another. The working group briefly discussed this but decided to defer the topic to a later time.
FIXGlobal: What are the mechanisms for adapting these best practices after implementation?
Bill Rosner: Constant feedback and communication among the buy-side and sell-side communities. We’ve been very encouraged by the desire that the sell-side community has shown to work with us to get this information flowing. In addition, the other FPL regional buy-side committees (EMEA and Asia Pac) and FPL Global Technical Committee have been great in providing feedback and support for this effort. We’re looking to leverage those relationships as we push toward complete adoption of the execution venue best practices.
Lee Saba: As a buy-side firm you’ll want a quick and easy way to capture the data in real time as well as historically. Also, as execution venues come and go you’ll need to track these changes. Essentially rendering, tracking and storing the execution data will be very important.
Brian Lees: We see this as an iterative process. Once this information begins to flow from the sell-side, validation of the data on the buy-side will be necessary to ensure  completeness so that some follow up can occur to address inaccuracies and omissions. Brokers in turn may need to follow up with some of the venues to encourage them to provide the necessary data. Diligence in creating this analysis/feedback loop will be an important ingredient for success.