How Best Ex Analytics Transform Trading Performance

Melinda Bui and Chris Sparrow

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In the high-speed world of financial trading, where milliseconds mean millions, efficient and effective trade execution is crucial. Enter FactSet Best Execution Analytics for Smarter Trading (BEAST) Transaction Cost Analysis (TCA)—a tool that transforms how traders and portfolio managers optimize their trading strategies. Let us explore how buy-side firms use this tool to achieve superior trading performance.

A Day in the Life of a Trader: The TCA Advantage

Meet Nancy Analyticks, the Head Trader at a prominent investment firm known for its meticulous trading approach. Her day begins with a deep dive into her post-trade TCA reports. Her goal? To uncover insights that will help her refine strategies and execute trades at the lowest possible cost.

Morning Briefing: Benchmarking and Insights

Nancy starts by examining the latest post-trade TCA report from BEAST—a cutting-edge tool providing comprehensive trade execution insights. BEAST allows Nancy to compare her trades against industry standards and past performances. Today, she notices that her execution costs for a recent large-cap trade are higher than the benchmark.

Curious, Nancy delves deeper using BEAST’s detailed cost decomposition to break down trade costs: market impact, slippage, and execution fees. The analysis shows that high execution costs are due to market impact during periods of high volatility.

Learning from the Past: Historical Analysis and Strategy Refinement

In the afternoon, Nancy reviews historical performance data using BEAST. She analyzes past trades and identifies patterns contributing to higher costs under certain market conditions. The historical analysis reveals that her trades often suffered from increased slippage during mid-day market hours.

With this insight, Nancy refines her trading strategy to avoid high-slippage periods. She collaborates with her team to implement changes, including adjusting trading times and optimizing order routing strategies.

Preparing for the Quarterly Review: Customizable Reporting

As the quarter ends, Nancy prepares for the quarterly best execution committee performance review. Using BEAST’s customizable reporting features, she generates reports outlining key findings of the overall trading environment. She highlights strategy performance, broker performance, and scorecard rankings, noting Broker A (Algo ‘Lann’)’s highest execution efficiency and cost savings achieved relative to benchmarks. On the other hand, Broker C (Algo ‘Little’) is ranked as the worst-performing broker due to the highest slippage and cost.

Further, she analyzes venue performance along with execution performance, benchmarking results, and the impact of recent strategy adjustments. The report highlights significant improvements in trading efficiency and cost reduction. Nancy presents this data-backed evidence to her superiors, reinforcing her reputation as a top-performing trader.

Figure 1 showcases sample charts from Best Execution Analytics for Smarter Trading (BEAST) Transaction Cost Analysis (TCA) designed to help Nancy Analyticks analyze her brokers and market performance.

The top row, featuring “Broker Performance vs. Value” and “Broker Scorecard,” displays the total value traded in USD for each broker, and the y-axis indicating performance against the Arrival Price. These charts help Nancy identify brokers handling the most significant volume and assess their performance, aiding in evaluating broker effectiveness and negotiating better terms.

The middle row, with “Performance vs. Volatility Bin” and “Performance vs. Spread Bin,” illustrates the relationship between value-weighted performance and an Arrival Price benchmark as a function of Volatility Bin and Spread Bin, guiding Nancy in refining her trading strategies under different market conditions.

The bottom row includes “Performance vs. Time in Market,” which evaluates order performance based on start and end times to highlight optimal trading times, and “Performance Based on Volatility vs. Spread,” a heatmap showing how spread, and volatility interact to influence trading performance. Together, these charts empower Nancy to make informed decisions, identify strengths and weaknesses across brokers, and maintain a competitive advantage in trading execution by aligning strategies with market conditions.

The Benefits of TCA for Buy-Side Firms

Nancy’s story is just one example of how TCA transforms trading performance. For buy-side firms like large asset managers and hedge funds, TCA provides a crucial edge in a competitive market. By leveraging TCA tools such as BEAST, firms can achieve several key benefits:

1. Enhanced Execution Quality: TCA helps firms benchmark their trading performance and identify inefficiencies, leading to improved execution quality and cost management.

2. Informed Decision-Making: Post-trade TCA analytics and detailed cost breakdowns enable traders to make informed decisions and adjust strategies promptly, reducing trading costs.

3. Strategic Refinement: Historical performance analysis helps firms refine trading strategies by uncovering patterns and trends, leading to more effective and efficient trading approaches.

4. Transparent Reporting: Customizable reports provide a clear view of trading performance, allowing firms to demonstrate their value and improvements to stakeholders.

In the dynamic world of trading, Transaction Cost Analysis (TCA) is more than just a tool—it's a strategic asset driving superior performance. Through real-time insights, detailed cost breakdowns, and historical analysis, TCA enables traders to optimize their strategies, to reduce costs, and achieve better execution outcomes. Nancy’s use of BEAST illustrates how TCA can transform trading practices and lead to significant improvements in market performance.

As buy-side firms continue to navigate the complexities of financial markets, embracing TCA will remain essential for enhancing trading efficiency and maintaining a competitive edge. Through storytelling and real-world examples, it’s clear that TCA is a powerful ally in the quest for optimal trading performance.