US Institutional Equity Trading 2015: Part 3 Crossroads of Best Execution

Execution quality is in high focus as buy-side firms raise their expectations of order handling transparency and the continued regulatory scrutiny of US equity market structure gives the buy side a strong hand. Congressional hearings, investigations by the New York Attorney General, fines and lawsuits have combined to put market structure under the spotlight, and a book full of accusations and sensation have added to the glare. The true impact of the SEC’s initiative to review thirteen market structure directives and the launch of the Tick Pilot have yet to be played out and buy-side firms are between skeptical and cautiously optimistic about whether there will be fallout.

Buy-side firms want more detail, analysis, and control. Still in various stages of technology upgrades and internal workflow changes, they need deep liquidity analysis for better trading decisions. Venue analysis and benchmarking need to be supplemented by the minute details of order handling, matching and routing logic – not just in the dark space, but equally trading in the lit markets. It is no longer sufficient to know what happened to an individual order, the new frontier is to determine what could or should have happened to the order that would have resulted in a better execution and an optimal alignment with the portfolio manager’s intent.

Greater control and responsibility for the buy side will again cause a shift in the relationship between the broker and their clients and provides as many challenges as opportunities for brokers. One thing is clear: market structure reviews and buy-side demand for ever-greater transparency are going to produce changes in the market place.