Venue Analysis and Execution Quality

Optimal execution in the distributed US equity markets demands advanced, real-time venue analysis and a new view of transaction quality.

Comprising 13 stock exchanges, nearly three dozen alternative trading systems, and numerous other liquidity pools, the US equities market is a distributed ecosystem where a notional value in excess of $325 billion is executed through more than 30 million trades per day.

With the introduction of new order types, varied matching logic, speed bumps, and ever increasing automated and high speed trading, the environment has become more complex, requiring greater analysis to achieve optimal execution.

As Larry Tabb puts it in his recent piece on Boosting Algo Performance with Venue and Routing Analysis: “Given the near-complete electronic trading environment, how you measure equity execution performance, what you measure, and how that information is analyzed are critically important to improving the performance of trading algorithms. Advances in algorithmic performance and execution quality can be made only with increasing investment in transparency – i.e., transaction analytics and venue and routing analysis.

The ability to assess the best type and route for a given order is driving the need for more sophisticated and timely analyses. While large buy-side firms have long relied upon Transaction Cost Analysis (TCA) as a measure of execution cost/quality, we see an evolution toward more granular analysis - what we generally refer to as Transaction Quality Analysis (TQA) - encompassing aspects of performance across the order lifecycle as well as execution performance of a trade, the trader/client experience, and, ultimately, consideration of relative performance to peers.

According to a recent report by Greenwich Associates – Venue Analytics: Routing a Path to Best Execution – 34% of buy-side traders were less than satisfied with their venue analysis capabilities and nearly half of all institutional equity investors globally plan to ask their brokers for customized algorithms this year.

What this points to is a growing demand for greater transparency and intelligence by trading firms, increased sophistication of analyses to improve execution and greater overall competitiveness.

Competitive advantage

A strategy is needed to navigate the complex interconnected ecosystem of electronic trading because consistently poor routing decisions result in poor trading performance. The synergy between technology and trading performance is well understood, but they represent two sides of a business that brokers strive to bridge.

With each order firms must be able evaluate the different venues and route it to the one that will deliver the best execution of the trading strategy being implemented. This is a growing business differentiator and, since trading firms will shift their flows to another broker if they don’t get the performance they want, brokers must be well-attuned to not just the performance by venue, but the performance by client by venue for the host of symbols and order types.

A growing number of new order types strengthen the case for real time visibility of venue performance. For example, real-time visibility can identify when a venue that typically executes a particular order type well may be having issues. This insight enables the strategy automation to shift the remaining portion of the order to another venue to maintain the intraday execution goals. It will also provide the explanation and insight to the client or quant of what happened and why Precision execution demands a precision view, whether it’s for killing an order if the right price is unavailable or expiring an order if it isn’t filled by the end of the day.

Speed, accuracy and adaptability are hallmarks of a business in which those with the best information and react the fastest have the advantage. Firms are more likely to get the price they want and achieve targeted fill rates if they are quickest to adapt to changing market, infrastructure and execution conditions. Unless they are leveraging new technologies like AI and machine learning to correlate intraday changes in venue execution with connectivity and technology performance to drive routing decisions, they risk becoming less competitive. The challenge, as with all things today, begins with obtaining the right data.

Bridging the chasm

At Corvil we provide a unique set of capabilities to help firms to perform venue analysis and improve execution through visibility into the technology infrastructure and the order lifecycle; the performance of systems, applications, and trades; and analytics to correlate these and other aspects of the execution.

By providing a correlated analysis of both the technology performance and trade outcomes, Corvil also helps bridge the organizational gap that sometimes emerges between business and technology teams.

In the case of markets, it’s about analyzing data in real-time around venue connectivity, outcome by venue by order type, symbol, and/or client/trader, etc.. These insights enable continual optimization and improvement of execution. Additionally, these efforts can be transparently explained to client/s/traders where required.

Corvil’s precision timestamping, capture, connectivity and component-by-component performance analysis provide a critical input to routing intelligence that offers insights for continual improvement. We track latency and, through AI-driven anomaly detection, both proactively alert to changes in venue/infrastructure performance and trade outcomes and provide the analysis to reveal where infrastructure performance may have had a detrimental effect on fill rates.

Because we capture the order lifecycle off the wire, we automatically correlate data from each trading venue and provide the information and insights that firms need to determine the best routing decisions at any given time; a venue that performed well one day might have responsiveness issues the next. We’ll see any signs of degradation and enable firms to identify better execution paths as needed.

Without advanced trading and routing technology, the ability to execute trades optimally is near impossible. In our experience, some firms may have an ability to evaluate venues in terms of fill rates or order types but they can’t correlate the data with latency on a real-time basis. As dependency on algorithms and electronic trading continues across multiple asset classes, this dual capability will only become more critical for business advantage.

Schedule a demo to learn more about how Corvil helps firms improve trade plant performance and trade execution.

David Murray

David Murray, Chief Marketing & Business Development Officer
Pico is a leading provider of technology services for the financial markets community. Pico provides a best-in-class portfolio of innovative, transparent, low-latency markets solutions coupled with an agile and expert service delivery model. Instant access to financial markets is provided via PicoNet™, a globally comprehensive network platform instrumented natively with Corvil analytics and telemetry. Clients choose Pico when they want the freedom to move fast and create an operational edge in the fast-paced world of financial markets.