What Firms Tell Us About Fixed Income Best Execution

In early 2016, a compliance manager from a global asset management firm met an ICE Data Services sales representative at an industry conference. The two struck up a conversation about challenges facing the industry, especially when it comes to proving, validating, and enhancing a firm’s ability to comply with various regulatory mandates governing best execution obligations. As the discussion progressed, they found themselves discussing challenges around measuring execution quality and demonstrating best execution. When the sales rep returned to his office, he shared the conversation with Tim Monahan, Principal Product Manager at ICE Data Services.

“What he described is a common conversation that we’re having with many people in the industry right now,” says Tim Monahan, Principal Product Manager at ICE Data Services. “We talk to firms around the world who are dedicated to regular and rigorous reviews of their trading activity, but they’re finding it challenging. Measuring fixed income trade execution quality is more challenging than measuring equity trade execution quality. Price is a key component of best execution assessment and, unlike equity prices that are readily available throughout the trading day, many fixed income securities trade infrequently, let alone trade continuously throughout the day. That’s the key reason ICE Data Services provides continuous evaluated pricing for fixed income securities* and has developed a Best Execution analytical tool using that service.”

The Internal Trade Execution Measurements Firms Are Using

Tim and many of the other reps at ICE Data Services have talked with firms across the globe to get an idea of how they’re currently measuring the execution quality of their trades. Here’s what he’s seeing when it comes to the typical process:

  • It’s Manual – Many of the internal processes used by firms to measure execution quality are a heavy manual lift. Completing the process requires heavy use of internal resources, which can take a lot of the time that firm employees could allocate to other tasks or projects.
  • Broad Analysis is Challenging – Due to the time and labor intensive nature of manual processes, many firms use a random sample to analyze and monitor trade execution quality. It’s common for the firms we meet with to be interested in expanding their analysis to cover a majority of their trades.
  • Firms Use Internally Generated Validations – By nature, processes managed internally can be limited in scope. In some cases, compliance teams ask a firm’s traders to reach out to brokers to gather data about trades [executed away from the firm] to help validate the firm’s execution prices.
  • Firms See a Definitive Need for Improvement – There’s a need that firms have become increasingly aware of to expand coverage across a wider set of trades, to see increased information for the trades covered and to automate pieces of the process.

Improving the Execution Measurement Process

The ICE Data Services Best Execution process was developed to meet the growing demand for tools that can be used to enhance execution quality analysis work streams and focus on meeting regulatory obligations around execution quality, improving trade strategies, reporting to board and trade surveillance committees, evaluating trader and counterparty activity, and being audit-ready.

To try our Best Execution service, we ask firms to send one of their historical trade blotters to ICE Data Services so we can score it using our Best Execution methodology and compare the results to the company’s existing internal process.

We send each firm a standardized template for submitting historical trade blotters which asks for the following information:

  • Bond identifier (CUSIP or ISIN)
  • Trade dates, including time stamps
  • Trade size
  • Trade price
  • Trade direction
  • Counterparty
  • Trader
  • And, when possible, execution method or venue

Once we received the blotter, members of our ICE Data Services team apply the Best Execution service, which provides a trade-by-trade measure of relative execution quality and assign scores to each trade. Each score is a percentile rank of a trade determined by comparing the trade to comparable transactions in the marketplace. In addition to a Best Execution score, we’re able to add additional data to the trade blotter, including: ticker coupon, maturity, a liquidity score, a trade cost analysis and a trader behavior heatmap. And, importantly, we’re typically able to cover close to 100% of the trades a firm executes.

What the Best Execution Report Offers Firms

  • Increased Coverage – The Best Execution service helps firms address the challenge of identifying a reasonable benchmark for all traded securities given how infrequently certain securities trade. By profiling the relationship of trade prices to the contemporaneous Continuous Evaluated Price for groups of similar bonds, we provide information that can be used across an entire asset class.
  • More Robust Information – We’re able to provide more analytics than what firms can typically generate on their own. As a result, trades can be analyzed on a deeper level for insights that can be used to inform a firm’s trading strategies. For example, a firm may note that its assigned Best Execution scores are noticeably higher on all-to-all trades and use that realization to evaluate funneling more traders into all-to-all transactions.
  • Automate Parts of the Process – Firms are able to automate portions of their heavily manual process by leveraging our Best Execution service and free up internal resources for higher value-added tasks within their organization.
  • Validation to Support Compliance – As a third party, we’re able to offer extensive data that supports validation of execution quality, which can be used by firms to help demonstrate compliance with regulatory mandates and help firms respond to investor queries and client questions. Obtaining a measure of execution quality can help firms demonstrate they are meeting their best execution obligations.
  • Multiple Perspectives into Trading Activity – The Best Execution service enables firms to review trade activity across traders, by execution method, according to buys or sells, by portfolio managers, sectors, or even execution quality across liquidity profiles.

How Companies Use Best Execution Information

Once the ICE Data Services Best Execution service is in place, firms are able to:

  • Analyze Execution Quality – The Best Execution Report is an excellent resource for analyzing trade execution quality for portfolio managers, traders, counterparties, sectors, etc. – in many cases, trade execution quality can be measured all the way down to an individual CUSIP.
  • Refine Trading Strategies – Knowing a trade’s Best Execution score enables firms to implement a thorough review process to help improve the effectiveness of fixed income trading processes, by reviewing trades that fell outside of preset thresholds. The Best Execution service can also be applied as a pre-trade screen for proposed trades to help analyze trades that may fall outside preset thresholds.
  • Gather Information About Relationships Between Traders and Counterparties – Firms have a responsibility to monitor the relationships their traders develop. The Best Ex Report can help firms identify activity between traders and counterparties that may warrant further analysis by providing an independent, objective analysis of trades.
  • Report to Best Execution or Trade Surveillance Committees – Many firms have a Trade Surveillance group that meets periodically to evaluate trading activity at the firm. In many cases, the Best Execution report can serve as a focal point of those meetings.
  • Aid in Investor Communications – Some firms share the Best Execution report with investors to highlight their efforts in measuring execution quality across internal employees and the dealers they do business with as firms seek to raise more capital from investors.
  • Prepare for Audits – Having Best Execution reports that can be quickly referenced for internal and external audits can help save time and money by reducing the man-hours required to compile this information on an ad hoc basis when responding to an audit.
  • Pre-Trade Transparency – In an environment where firms are being asked to produce more with less, gaining additional pre-trade transparency across entire sectors, comparables, and asset classes can help enhance a fixed income analyst’s ability to produce in-depth quality research reports and analysis.

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*Evaluated pricing, including continuous evaluated pricing, provided in the United States by Interactive Data Pricing and Reference Data LLC and internationally through Interactive Data (Europe) Ltd. and Interactive Data (Australia) Pty Ltd.