“David Michael, Head of Trading for Linear Investments, answers our questions on his approach and strategy around venue selection and preferences”
Venue selection strategy requires us to ensure our clients receive best execution on a consistent basis. Where we are executing client orders directly, the responsibility for best execution lies with us. When we place client orders we rely on multiple brokers to execute orders on an agency basis with the same responsibility. In these circumstances, our role is to monitor our brokers execution performance, the causes of poor performance. It isincumbent on us therefore to monitor measures to use in identifying differences in venue selection by brokers.
We ensure we liaise with brokers to improve execution via venue selection. Perhaps the key question for us is: does venue selection show up in post trade/ transaction cost analysis?
Once we have established the key factors to identify good and poor performance via Transaction Cost Analysis (TCA) metrics, we can then discuss changes to the SOR, ergo venue preferences. This may vary by market and stock. For example, we may be limited in the number of counterparts we are able to request a quotation from on an illiquid name. So we would depend on brokers to provide access to liquidity and price discovery and therefore assist us in achieving best execution. This will depend on the degree of specialisation in the instrument traded & the likelihood of execution. Never underestimate the ability to settle in a timely and cost effective fashion. All measures of Best Ex must be incorporated.
Performance is a function of which broker we select to execute. This is done on a case by case basis. Their SOR and venue choice therefore directly affects the performance of the parent order. We can switch SOR choice during an execution. Albeit this may affect settlement costs. So we try to make the right choice before executing.
We have a real time TCA tool. Practically it is impossible to monitor all executions at all times. Typically we monitor post trade and relay any slippage to our brokers where we feel slippage compromises the key components of Best Execution: Costs, speed; settlement etc. The ability to retain anonymity in the market; and therefore avoid information leakage to the market is also relevant here.
We don’t look at venue analytics directly; we monitor our brokers access to those venues and ensure they amend venue selection to stay consistent with Best Execution. Some clients may ask us to access specific venues (such as Primary even though this can be costly) and in such circumstances, comply with the client request provided they have met FCA rules on this.
This is the decision of the executing broker to which the order is sent, (Fill Ratio, maker/taker fees, adverse selection / reversion, spread cost, mid-spread liquidity, price/quote volatility) will all factor into their decision which will manifest itself in execution quality. There may be additional factors such as broker ‘indication of interest’ trade history (may wish to trade with one broker in one name to minimize information leaks). TCA data may show evidence of reduced execution costs. The overwhelming percentage of our orders are executed through electronic ‘fix’ access. Venues such as block crossing networks or alternative trading venues may help execution performance. For Prime relationships there is the added issue of trading to access leverage.
We do not hold specific benchmarks, we benchmark execution quality against clients benchmark and analyse for any slippage and even for outperforming benchmarks. This is an ongoing policy to treat executions on a case by case basis. It does impact our choice of strategy within the clients requirements. E.g. a ‘With volume’ strategy, we would try to remain below 10% to avoid information leakage provided this is consistent with the clients goals. Costs, fill ratios and impact all factor into our post trade analysis.
Not specifically, we look at executions on an individual basis, where using programs we will look at overall and individual performance for any outliers. We treat executions on a case by case basis with post trade TCA the starting point.
Not on a general basis but we may remove a venue on specific concerns over information leakage or poor quality executions. Our choice of strategy and executing broker would impact our venue selection. This can be managed by excluding venues from their roster of venues.
As we stated above, we tend to remove a venue for information leakage rather than focus on specific venues.
(ex., IEX, M-ELO, IntelligentCross).
We rely on 3rd party brokers to execute, our role is to monitor their overall performance. Breaking this down on a granular level starts with our post trade TCA allows us to then identify any venue that would be preferential to execution. This does give us the advantage of a broader menu of order types, algos and various SOR’s to access.