Free Site Registration

FLASHBACK FRIDAY: Rethinking Pre-Trade: Brokers re-write the rules of pre-trade cost analysis

Traders Magazine Online News, September 29, 2017

John D'Antona Jr.

It’s time for change.

When evaluating the trade process, the brokers and now independent vendors are carefully helping the buyside dissect each piece to see where the best value, highest alpha and least amount of risk lay. It has undergone significant change in the last several years. But one thing remains – the importance of performing a thorough pre-trade examination.

“Pre-trade checks, as always, are about understanding all the dynamics at play that drive price discovery for any given order, including liquidity characteristics of the instrument itself and similar influences at the sector and market level,” said Frank Freitas, Pluribus Labs CEO and formerly Global COO at Instinet. “The scope of information that goes into this understanding has increased steadily with time.”

Pluribus distills powerful predictive analytics from a variety of unstructured data sources. According to the firm, “their solutions add significant value to a variety of portfolio management and trading workflows.”

As an example, in Pluribus’ own research, the firm sees real and systematic intraday linkages between conversations about securities on social platforms and trading behavior of those securities.” Back in 2005, social media was in its infancy and with the trading world largely ignoring the medium and platforms when it came to discussing trade ideas or companies. As a matter of fact, Twitter, one of the biggest social media platforms and is in heavy use by traders, wasn’t founded until March 2006.

“The challenge is to consume these disparate sources in a streamlined workflow that enables strategy selection and order entry in a timely, efficient manner,” Freitas said.

This article originally appeared in the September 2005 issue of Traders Magazine

Rethinking Pre-Trade: Brokers re-write the rules of pre-trade cost analysis

By Peter Chapman

Trade cost prediction doesn't get much respect, but that isn't stopping the Street's equity shops from rolling out new models. This summer, three of the largest institutional brokers launched efforts to bring the nascent science of pre-trade transaction cost analysis to their buyside customers. Credit Suisse First Boston, Piper Jaffray and Lehman Brothers are all debuting new systems and/or integrating their technology with buyside order management systems.

None of the three claims to have come up with a methodology that forecasts a trade's cost with 100 percent accuracy, but all say they have improved upon the status quo.

"The general impression in the industry is that the practice of estimating transaction costs is not very worthwhile," says Piper exec David Mortimer, "so we do it differently."

Execs at CSFB echo Mortimer's comments. "Most of the models I've seen are not based on any scientific research," comments Merrell Hora, a quant in CSFB's advanced execution services group. "They are just assumptions that are convenient for computation. It's garbage in; garbage out. That approach gives you the results we hear about."

Those results are believed by the experts to be in the 11 percent to 12 percent range. That means that a pre-trade cost estimate is accurate no more than 12 percent of the time.

For more information on related topics, visit the following channels:

Comments (0)

Add Your Comments:

You must be registered to post a comment.

Not Registered? Click here to register.

Already registered? Log in here.

Please note you must now log in with your email address and password.