TOP STORIES 2012: Buyside Demands More Routing Transparency
Traders Magazine Online News, January 7, 2013
Buyside traders and fund managers are demanding their brokers shine some light on one of the enduring mysteries in the securities industry: Exactly what happens to an order once the send button is hit?
The advancement of trading technology over the past decade has meant that buy and sell orders are sped around the market virtually instantaneously. But what is not as clear is exactly where the orders go, which venues are favored for fulfillment and which are ignored, and-most important-who gets to see each order and what, if anything, is done with that information. Once a parent order is sliced and diced into thousands of child orders, it is very difficult to see where they get executed.
Indeed, even as trading algorithms and smart order routers allow them to have greater control over their orders, many buysiders-pushed by their fiduciary responsibility as money managers to be able to explain all costs-have been increasingly seeking out trade routing information, demanding that sellside brokerages and traders provide a clear and understandable path of the order route. Most crucially, asset managers and their traders need to be able to quickly identify and correct any trading discrepancies, especially those that exposed the trade order and consequently may have negatively impacted the buyer's price.
Driving much of this, of course, is the buysiders' fear of dark pools, or more accurately, fear of the high-frequency traders lurking within them. Usually, brokers will first send orders to dark pools, often within their own systems, and then if not fully filled, the broker will send the order out to other venues-other dark pools or exchanges-until the order is filled. But it's this end of the routing path that concerns buysiders the most. The more venues an order is sent to, the more likely that information leakage can occur, and in the worst case, damage the price the buyer is paying as other buyers pile in ahead of the big order.
Craig Jensen, Armstrong Shaw
What are buysiders doing now about their desire for further order transparency? Many are demanding upfront that brokers provide more information. In an April survey of hedge funds by Tabb Group, 53 percent said they wanted improved operational transparency in their algorithmic trades and many indicated they would use this information to improve how they use their algos.
Others are pushing further-Morgan Stanley has been urging the Securities and Exchange Commission to require that brokers give customers quarterly reports detailing how they route orders. And earlier, the Investment Company Institute wrote the SEC to suggest the regulator consider new disclosure rules on trade order routing.
Recent events such as the Knight Capital trading glitch and the May 2010 flash crash showed that buyside managers are smart to seek more transparency for their trades and should keep pushing for that in the future, said Craig Jensen, principal and head of trading at New Canaan, Conn.-based Armstrong Shaw Associates. Asset managers need to ensure there is an easy flow of information from their brokerages about trade routing, prioritization and access to fill data, he explained.
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