Traders today are long data whether they like it or not. The quantity — and the granularity — of information about their executions grows with each passing year.
And whereas transaction cost analysis (TCA) has allowed institutional investors to navigate this forest of data to find actionable intelligence, the more granular capabilities of execution analysis (EA) systems provide an even greater range of options. One has to figure out how to best tailor the data to make it work for your institution. Where does one make the cut?
Reports about unusual trading results (outliers) are the most popular request in both order-level TCA execution analyses. The trick is to establish the right method in how the data will be used, and in our view that lies in choosing the right lens to examine the data and then finding the right pattern in the data that is relevant to your strategy. The question of outliers can be settled in an entirely different fashion and without a blizzard of numbers. The trading strategy itself is the real object of analysis, not the individual outlier trades.
Uncertainty has driven some participants to take best execution to mean simply best price, and execution analysis tends to encourage this, because prices are almost the only things really moving at millisecond intervals. But best price at the fill level is not the same as best execution. Best execution entails the best outcome under the circumstances surrounding the particular order or investment decision.
The way we determine the best execution is through a lens that differentiates itself by focusing on trading strategy. The granularity of data then adds more value, and strategy is the core element of the final result. So what makes EA such a valuable tool is that it can change criteria for judging and sorting data, depending on real-time trade results.
Execution analysis exposes the core issue in day-to-day operations, trading strategy, and paves the way for real-time decision support. In the end, it is the suite of applications which will distinguish execution analysis from order-level TCA, along with questions which evolve with the data itself.
This adaptability, this ability to cut through the massive amounts of data available on so many levels, is what makes execution analysis stand out in a world accustomed to TCA.
Ian Domowitz is managing director and head of analytics for ITG.