Matching Analysis | Insight

Theorem Insights:

Match Analysis Puts the Focus on Execution Quality

Brokers and asset managers alike must provide best execution to their clients, and a big part of best execution is transparency – in process, practice and performance. In fast-moving markets, there are ample opportunities for mistakes to occur, no matter how skilled the trading desk. During post-trade processing, when buyers and sellers match the details of orders, change the record of ownership and make/accept payment for securities, quality execution ensures that these tasks are carried out efficiently, accurately and transparently.

However, gauging the quality of execution has always been a challenge. Recently, Theorem Technologies introduced a new tool that can help clients assess and rank execution desks. This is a great step forward in terms of risk management and process control, as this is the first tool giving clients the capacity to make decisions about brokers based on an objective, quantitative metric.

Pre-and post-trade execution involves a plethora of moving parts. This is true no matter what market a client is transacting in. Risk is unavoidable. As an example, consider the bond market. Depository Trust and Clearing Corporate (DTCC) research found that roughly 10% of all global fixed income transactions fail to be matched, confirmed and locked in for settlement on the trade date. This creates considerable risk. These kinds of failures not only create consternation in the back office but can make it difficult for asset managers to efficiently implement investment strategies. This is true across asset classes and markets.

Theorem’s solution not only determines match status but monitors and measures patterns in data. This allows firms to assess the performance of executing brokers. The score is based on many factors, such as security, price, quantity, cash balances, and allocation, and includes the time elapsed until trades are matched. Not only is it possible to compare the performance of execution desks overall, but the score can be broken down to compare execution by market and by trader. The matching process is made transparent and firms can easily assess the quality of their existing relationships as well as use the match score to evaluate new executing brokers. It introduces a new level of accountability for the execution desk since performance becomes measurable.

It’s abundantly clear that poor execution support is a major source of risk. When trades aren’t booked or allocated appropriately, it can be a minor annoyance or a potentially very expensive mistake. There can be issues with margin, for example, when collateral requirements aren’t met on trades that are not allocated. Ongoing trade breaks can also result in increased exposure to market risk. Not only do mistakes cost money, but they can also trigger compliance actions internally or even set exchange compliance mechanisms in motion. In the worst cases, there can be significant fines involved.

Poor execution increases risks, leads to a greater number of errors and increases costs. Match analysis and scoring gives clients greater control over people and the post-trade process and provides firms the opportunity to reduce the amount of money they spend on middle- and back-office support. Once clients increase insight, accountability, and control, only then can they focus on generating a profit rather than reducing a potential loss.

 

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Rebecca Baldridge, CFA, is an investment professional and financial writer with more than 20 years of experience in creating content and research for asset managers, investment banks, brokers and other financial services clients. She’s worked for some of the biggest names in the industry, including Merrill Lynch Asset Management, JP Morgan Asset Management, BNY Mellon and Franklin Templeton. Rebecca also spent 9 years as an analyst and director of equity research in Moscow, working for several Russian banks. In late 2019, she founded Quartet Communications, a boutique communications firm serving financial services clients. Her writing has been published in outlets including Pensions & Investments, MSNBC.com, Inc. magazine, and Investopedia.com. She holds a B.A. in Russian from Purdue University and an M.S. in Finance from the Krannert Graduate School of Management at Purdue.

 

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