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7/29/2019 ITG TCA - Koscom Seminar March 2013
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Subtitle
Koscom Seminar
Transaction Cost
AnalysisMarch 2013
2013 Investment Technology Group, Inc. All rights reserved .Not to be reproduced or retransmitted without permission.
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SubtitleAgenda
Introduction to Transaction Cost Analysis (TCA)
What is TCA?
Why use TCA?
Why Measure?
TCA and Post Trade
TCA in practice
Timing cost
Impact Cost
Reversion
Momentum
Tools of the Trade(r) Pre trade analysis
Post trade TCA
Peer analysis2
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Subtitle
Introduction to TCA
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Subtitle
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What is TCA?
Transaction Cost Analysis (TCA)
Measuring and analyzing the factors which affect the price an order is executed at
Usually involves taking time-stamped data at various points through theinvestment and trading process, and comparing it to the price of the equity in themarket at the time, as well as an overall benchmark for the trade
The goal of analysing and understanding trading costs is to define whereunnecessary or disproportionate costs arise
TCA is an important part of the ongoing feedback loop to measure trading costs,so that they can be reduced
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SubtitleWhy is TCA important?
Best Execution
Trading in the most efficient way possible in order to preserve alpha, reduce costs &improve fund performance
A process rather than a price
Has a significant impact on fund performance
Absolute terms (dollars under management) eg US$24mm saving in 1 year for a$2bn fund
Relative terms (funds performance against peers) a move of a decile in rankingsby improving trading efficiency
Focus area for industry practitioners and regulators globally
MiFID regulations (Europe) & RegNMS (US) mandate Best Execution
Many global pension funds & plan sponsors now require proof of trade costmanagement policies before investing with a chosen fund manager
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SubtitleYou cant manage what you dont measure
What are trading costs?
The difference between the price whenthe decision to trade was made, and theaverage price of executing the order
(a) Explicit / Visible costs such as
brokerage/commission fees and taxesonly20%
(b) Implicit / Hidden costs including marketimpact and delay (timing costs) costsaround 80%
Commissioncosts
14bps (22%)
Source: ITGs global t rading cost reviewavailable at www.itg.com
TAXES
COMMISSION
MARKET
IMPACT
DELAY
SPREADImplicit (Hidden) Costs 50bps (78%)
Market Impact
Delay Cost
Timing Gain/Loss
Opportunity Cost
Asia Ex-Japan TradingCosts
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SubtitleHow to save your fund money
ITG Peer Analysis of trading costs in Q2 2010 shows:
average cost = 50bps
standard deviation = 40bps
For the same fund with US$2bn AUM and 75% annual turnover:
With poor execution: average cost = 90bps per trade (50 + 40)
Total cost of execution = 90bps x 2 (buy & sell) x 1.5bn =
$27million of cost or 1.35% of overall fund value
With average execution: average cost = 50bps per trade
Total cost of execution = 50bps x 2 x 1.5bn = $15million of cost or0.75% of overall fund value
With good execution:average cost = 10bps per trade (55 40)
Total cost of execution = 10 x 2 x 1.5bn = $3million of cost or0.15% of overall fund value
Costsaving of
$24millionper annumor 1.2% offund valuebetween awell
executingand a poorlyexecutingfund
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SubtitleHow to improve your performance versuscompetitors Annualised cost savings can make a big difference in peer group ranking
Analysing Australian funds over 3 year period - reducing trading costsfrom the 70-80bps range to the 30-40bps) range can move a fund over adecile up in fund rankings with no change to investment strategy
Fund Rankings
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Performance Deciles
TotalReturn3Years(%)
Highes t Return Lowes t Return Median
Source: Intech
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SubtitleTCA and Post Trade reports
Post Trade Reports TCA Reports
Objective Monitor daily execution Identify outliers Provide reasoning behind a
particular trading strategy
Provide details on the daysexecutions
Identify longer term trends Optimize decision making process Promote discussion between
portfolio manager, trading desk
and broker
View Usually a single day Orders given to a single broker Holistic, can identify overallperformance on decision size by
PM, as well performance on slicesprovided to the desk or broker
Frequency Daily Sometimes intraday Usually Quarterly Sometimes (semi)-annually
Timeframe Between 1 and several days Between 1 and 4 quartersFocus Trader/Algo/Broker execution on
the day
The investment process from PMdecision thru trading desk and
broker execution
Audience Trading desk, sometimescompliance
Portfolio Managers, Trading desk,compliance
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SubtitleTCA in Practice
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SubtitleThe trading continuum: Definition of terms
Execution Cost: Manager Timing Cost (1) + Trading Timing Cost (2) + Broker Execution Cost (3)
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SubtitleTraders balance impact and timing
Question for the trader
Do I participate or not?
If I do how much?
Low participation
High participation
If I dont what is the
cost? Not trading carries
timing costs
-100
-40
-10
-5
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-150
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
Case A Case B Case C
Illustration of Cost Tradeoff
Timing Impact
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Subtitle
A delicate balancing act case study 1
Sell Korea Exchange Bank (004940 KS)
Order Size 800% MDV Start Date: Sept 17, 2012 pre Open
End Date: Nov 27, 2012 (51 Days to completion)
Delay Cost: -700 bps (US$ -2.0 mm)
Total Cost: -730 bps (US$ -2.1 mm)
Avg. Participation Rate: 12%
PWP 20%: KRW 8,175 or -450 bps 33 days horizon (Nov 2)
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Subtitle
A delicate Balancing Act - Case Study 1 (Cont.)
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SubtitleMeasuring participation
95%90%
80%
55%
23%17%
3%
4%
10%
23%
20%
10%
1%3%
7%
12%
20%
25%
1%2% 2%
5%
28%
30%
1% 1%3%
5%
10%
2% 4%8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
A) 0 - 5% B) 5 - 10% C) 10 - 25% D) 25 - 50% E) 50 - 100% F) >100%
%V
alueTraded
Distribution of Value Traded by MDV & DTC Group
A) 1 Day B) 2 Days C) 3 - 5 Days D) 1 - 2 Weeks E) 2 - 4 Weeks F) 1 - 2 Months
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Subtitle
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SubtitleA delicate balancing act - case study 2Reversion
Sell order 700% MDV
Reversion Cost: -618 bps (US$ 8mm)
Avg. Participation Rate: 45.4%
Reversion Period
Order Duration
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Subtitle
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SubtitleMeasuring participation
91%
78%
54%
28%
9%6%
5%
7%
25%
30%
13%
5%
1%
11%
14%
30%
47%
16%
2% 1%4%
8%
11%
24%
1% 3% 2% 3%
19%
38%
0% 0% 0% 0% 1%
10%
0% 0%0% 0% 0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
A) 0 - 5% B) 5 - 10% C) 10 - 25% D) 25 - 50% E) 50 - 100% F) >100%
%ValueTrad
ed
% MDV Group
Distribution of Value Traded by MDV & DTC Group
A) 1 Da y B) 2 Da ys C) 3 - 5 Day s D) 1 - 2 Week s E) 2 - 4 We eks F) 1 - 2 Mon ths G) 2 - 3 Mon ths H) >3 Months
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Subtitle
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SubtitleIntraday Alpha Profile (T-5 to T+5)
-250
-200
-150
-100
-50
0
50
100
150
T-5
T-4
T-3
T-2
T-1
TZero
T+1
T+2
T+3
T+4
T+5
b
ps
Intraday Alpha Chart
Buys Sells Net
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Subtitle
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SubtitleTools of the Trade(r)
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SubtitlePre Trade Analysis
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SubtitlePre Trade Analysis
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Subtitle
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Subtitle
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SubtitleITG TCA performance by quarter
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Subtitle
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SubtitleITG TCA liquidity management
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SubtitleITG TCA b k i i i
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SubtitleITG TCA broker commission review
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SubtitleITG P A l i l
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ITG Peer Analysis - example
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SubtitleITG P A l i l
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ITG Peer Analysis - example
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SubtitleP R t E l
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Peer Report Example
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Subtitle
Appendix
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Appendix
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SubtitleWhats in a benchmark?
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What s in a benchmark?
EoT+ Xmins
DISCRETEAVERAGE PRICE
BENCHMARKS
I.S VWAP PWP
OpenStart to
EODFull DayVWAP
I-VWAPBid/AskPDCArrivalX%
Participation
Last Next Mid Mid+X mins
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SubtitleComparing apples to apples
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Comparing apples to apples
Problem: when comparing using Implementation Shortfall not all trades
are created equal
Demand for liquidity may be different Market conditions may be different
Spreads may be different
Solution: Create a handicap (much like golf) in an effort to equalise the
field1. Modelled approach ACE/Post Trade ACE
Advantage: takes all relevant parameters into consideration
Disadvantage: Model. Struggles at high ADV trades
2. Peer approach
Advantage: real life trades comparison
Disadvantage: complex, requires a large dataset
3. Average pricing for participate (PWP) approach
Advantage: looks at the market over the life of the PWP horizon
Disadvantage: ignores own trade impact31
SubtitleDisclaimers
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Disclaimers
Broker-dealer products and services are offered by: in the U.S., ITG Inc., member FINRA, SIPC; in Canada, ITG Canada Corp., member
Canadian Investor Protection Fund (CIPF) and Investment Industry Regulatory Organization of Canada (IIROC); in Europe, Investment
Technology Group Limited, registered in Ireland No. 283940 (ITGL) and/or Investment Technology Group Europe Limited, registered in IrelandNo. 283939 (ITGEL) (the registered office of ITGL and ITGEL is First Floor, Block A Georges Quay, Dublin 2, Ireland and ITG L is a member of
the London Stock Exchange, Euronext and Deutsche Brse). ITGL and ITGEL are authorised and regulated by the Central Bank of Ireland; in
Asia, ITG Hong Kong Limited (SFC License No. AHD810), ITG Singapore Pte Limited (CMS Licence No. 100138-1), and ITG Australia Limited
(AFS License No. 219582). All of the above entities are subsidiaries of Investment Technology Group, Inc. MATCH NowSM is a product offering
of TriAct Canada Marketplace LP (TriAct), member CIPF and IIROC. TriAct is a wholly owned subsidiary of ITG Canada Corp.
These materials are for informational purposes only, and are not intended to be used for trading or investment purposes or as an offer to sell or
the solicitation of an offer to buy any security or financial product. The information contained herein has been taken from trade and statistical
services and other sources we deem reliable but we do not represent that such information is accurate or complete and it should not be relied
upon as such. No guarantee or warranty is made as to the reasonableness of the assumptions or the accuracy of the models or market data used
by ITG or the actual results that may be achieved. These materials do not provide any form of advice (investment, tax or legal). ITG Inc. is not a
registered investment adviser and does not provide investment advice or recommendations to buy or sell securities, to hire any investment
adviser or to pursue any investment or trading strategy. All information, terms, and pricing set forth herein is indicative and based on, inter alia,
market conditions at the time of this writing and are subject to change without notice. All trademarks, service marks, and trade names not owned
by ITG are the property of their respective owners. Any opinions expressed in this document solely reflect the judgment of the author(s) on this
date and are subject to change. The screen shots provided herein contain sample data and represent hypothetical examples of certain products
available from ITG. All functionality described herein is subject to change without notice.
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