Is there a tradeoff between execution fees and the execution performance delivered to my customer?
The simple answer is yes, There are clear trade-offs based on a trades intent to maximize performance or minimize execution fees during normal market conditions. However, we wanted to further assess the potential implications to performance during periods of volatility. We analyzed VWAP performance during recent volatile market conditions across three groups of routing profiles aligned with a broker’s intent when executing a client’s order. The groups were:
- Fee sensitive – attempts to minimize execution fees
- Fee agnostic – maximizes execution performance
- Blended – attempts to balance the trade-off between the two
In analyzing the performance, we concluded that brokers who optimize costs to minimize execution fees are doing so at the expense of overall performance. Note the following results:
Evaluating Performance
VWAP Performance Basis Points
| The fee-sensitive configured algorithm missed the VWAP and underperformed by 7x as compared to the fee agnostic and the blended missed by 3x. |
VWAP Fees Cents per Share
| Rebates/commissions earned by the fee sensitive configuration was 5x greater than the fee agnostic and the blended was 3x better. |
Are the rebates worth it?
As the buy-side becomes more involved and accountable for best-ex protocols, they are also becoming more conscious of the performance of the brokers in their network. For brokers who use fee sensitive configurations versus the fee agnostic configurations, the tradeoff could be the difference of getting the next order. While these brokers are receiving greater rebates, they are doing so by sacrificing performance and adversely impacting their business relationships to the point where they may lose business.
To illustrate further, assume you executed 100,000 shares of XYZ at $125/share. The notional value (dollar value of the shares executed) is $12.5 million dollars. The table below illustrates that for $12,500,000, notional using the fee sensitive configuration, you are potentially giving up $7,913 in performance for only gaining $153 in rebates.
|
Trade Example |
$12.5M Notional |
|
|
100k shares executed XYZ @$125/share |
VWAP Performance |
Fees (Rebates) |
|
Fee Agnostic |
$ (1,275) |
$ (35) |
|
Fee Sensitive |
$ (9,188) |
$ (188) |
|
Difference |
$ (7,913) |
$ (153) |
Is sacrificing 7x in performance for your client worth $153 or is proving performance the better tradeoff?
The choice is yours.