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Demystifying Best Ex in a World of Fragmented Markets and Dark Pools

We continue to hear from both buy-side managers and Tier 1 sell-side trading desks that “securing best price execution is a both a primary goal and a paramount concern.”  

It’s obvious why best price would be a ‘primary goal’; after all, who wants to think they’ve “overpaid” when executing a block of a particular stock, a seemingly illiquid ETF, or a complex option-related hedging strategy?

But, the definition of “best ex” is subject to interpretation and debate; that’s why it’s also a ‘paramount concern’ to those that have a fiduciary obligation, to those that must conform to regulatory oversight, and certainly to those whose investment performance is benchmarked to a peer group.

Securing better transaction prices (with nominal market impact) when entering or exiting a strategy necessarily enhances P&L, and in turn, necessarily improves overall investment performance; the metric of every investment manager that seeks to maintain or increase funds under management.  

The argument can be made that true best ex can deliver “savings” that amount to as little as 10 bps, or as much as 100bps annualized, depending on the circumstances. Even 10bps on a $500 million+ portfolio is real money in today’s market.

The traders we speak with are the type that don’t walk passed a $10 dollar bill lying on the ground; that’s why they rely on select, agency-only trading desks for their execution needs, and that’s why firms such as WallachBeth Capital have become recognized as experts on the topic of best execution.

We believe that whenever discussing (and delivering) “best ex”, the dialogue needs to take into account:

  •  Distinction between agency-only and principal execution; potential contra-party conflicts
  •  Liberating hidden liquidity; distilling visible liquidity
  •  order complexity
  •  potential market impact
  •  depth/degree of connectivity to the broad spectrum of electronic venues and liquidity centers
  • Extent of relationships with true liquidity providers
  • Product knowledge
  • Post-trade analytic reports that document customer is meeting fiduciary obligations/mandates

 



Disclosure: no stocks mentioned