These days, the buy-side is looking to find out more and more about where brokers are sending its orders. For many years now, full broker transparency on order routing has been difficult to attain, but in an environment driven by performance and regulation this is about to change.
There are several reasons why the majority of brokers currently do not – or in some circumstances cannot – provide the buy-side with such a granular level of detail. Legacy systems, conflicts of interest and the fact some buy-side firms are simply not asking brokers for the information, all play a part in keeping the order routing process so enigmatic.
Back when electronic order handling first took off in the trading world, broker systems did in fact send thousands of orders, cancels, executions and messages to buy-side systems. It was a torrent of information the buy-side basically couldn’t handle. In response to this, brokers began to develop filters within their systems to ensure only execution data was sent to asset managers and ever since, these filters have remained in place.
Jonathan Clark has more than 20 years experience working at various asset management firms including Blackrock, where he headed up equity trading for the Americas. Currently, he is the chief executive of a firm born out of the buy-side’s frustration with obscure, conflicted and costly methods of order routing.
“Throughout my time on the buy-side, I did a lot of work on broker-routing and order destination analysis,” says Clark, CEO at Luminex Trading & Analytics. “I wanted to know where my orders were going, where I was having success and failures, and which trading venues were charging higher fees for my orders.”
As full order routing transparency continues to top the ever-growing list of concerns for asset managers, trading technology companies are slowly but surely emerging to provide such solutions to the buy-side.
Chief executive at Dash Financial Technologies, Peter Maragos, has seen this trend developing first-hand. Dash provides a technology platform offering full order routing transparency, and Maragos says the firm has seen considerable growth in recent years, in large part due to its transparency services.
“Prospects aren’t used to seeing what we provide and it creates real excitement,” Maragos claims. “Order routing transparency has become a genuine issue for the buy-side. With regulations like MiFID II looming and its global impact becoming clear, transparency and unbundling are more relevant than ever to clients globally.“
He adds that in an environment where the buy side’s performance is as scrutinised as it is, being able to fully control orders and gain total, granular level transparency into your execution is imperative. Every basis point counts in terms of execution quality.
Similarly, Clark at Luminex, which provides a fully transparent alternative trading venue for the buy-side that does not route out orders, says there are technology firms in this space that provide market-based solutions to help the buy-side interpret the complex, granular data.
However, as is often the case, the cost of implementing such a system can be one of the most influential factors for asset managers. But in most cases it is a matter of implementing the platform, system or product.
“There is interest on the buy-side and they want to know more, but often price can be the ultimate determinative. Some will say they prefer to use the traditional methods to evaluate performance rather than go into such granular detail,” Clark says.
In many ways, the buy-side could do more to ensure brokers provide full order routing transparency. Interestingly the majority of brokers are not unwilling to provide the data, but the lack of resources and nagging legacy systems at the majority of asset management firms’ means sell-side firms are often not asked for the information.
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