Venue Analysis Is More Than TCA

Posted by Brian Schaeffer on May 8, 2018 12:02:21 PM

Traders have always strived to attain high quality executions, but measuring execution quality is now more important than ever. 

In our current regulatory environment—with the implementation of MiFID II and the SEC’s proposed increased order transparency rules—it’s critical that brokers and asset managers be able to effectively share information and collaborate to achieve best ex. Whether your firm falls under MiFID II regulations or not, end investors are demanding more transparency into the investment process, so both the buy and sell side need to have the right tools and processes in place to demonstrate their best-ex protocols.

It’s no secret that venue analytics are a key component of execution quality, but even though 86% of equity trading desks now use TCA, venue analytics have been cited by many traders as a functionality lacking from their traditional TCA products.* So what’s the real difference between the two and do you need both?

Venue analysis is one micro-level metric that helps explain the macro-level performance metrics generated by TCA. In recent years, venue analysis results were often seen as something the buy side couldn’t do much about; they weren’t all that actionable. They could ask their brokers to shut off certain venues completely, but it was ultimately left to brokers to decide how to optimize their algorithms and determine the best venues to route to.

To bring increased clarity around venue performance and more opportunity for collaboration to the industry, we’re launching Clearpool’s Venue Analysis. Our product is an independent, forensic tool for examining historical performance of venues across the equities market. It makes it easier than ever to see exactly where trades are routed and how venues performed based on the “intent” or goal of the trade. Whether you want to examine which venues performed well when pinging lit markets, which ones were best at sourcing midpoint liquidity, or where you experienced reversion while resting in the dark, multiple filters allow you to quickly drill down into the data to see exactly that.

For instance, say you’ve been experiencing reversion in your dark aggregation strategy. You can go into Venue Analysis and examine your executions in that trading strategy over a selected time period. You take a look at reversion across all venues and notice that Venue A is where reversion is most severe. Then you click to examine trade size across those venues and see that Venue A is also where you’re getting most of your large block prints.  You don’t want to miss out on that liquidity but you also want to minimize information leakage, so you may want to make an adjustment to your dark aggregation strategy and add a minimum execution size for Venue A.  Now, you’ll still be able to get those block executions, but you won’t get any of the smaller, potentially reversion-causing fills on Venue A.

This is how having the ability to examine venue performance based on the intent of the trade allows you to prioritize venues according to the type of orders where they perform best. You no longer need to treat a venue’s performance as absolute and choose whether to remove it from your routing protocols completely.

The intuitive, transparent design of Venue Analysis goes hand-in-hand with our Algorithmic Management System (AMS), allowing for a new level of collaboration between the buy and sell sides. For traders and sales traders, the ability to share comprehensive venue analytics with their trading partners opens up the lines of communication—and allows brokers to more efficiently customize algorithms designed to fulfill the desired outcomes of their buy-side clients. Together, they can analyze venue performance on a monthly or quarterly basis, determine whether to make any changes to routing protocols within the client’s algorithmic strategies, then make those changes right then and there in the AMS. This is how Clearpool is making venue analysis more relevant and actionable for all market participants and how it can help you optimize your routing protocols and demonstrate best execution.

See it to believe it. Click here to learn more and start your free trial today.

*Greenwich Associates Q1 ’18 “TCA Usage on Equity Desks” and Q1 ’17 “Control and Transparency” reports

Topics: Venue Analysis

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