NEW YORK — Institutional investors should ride out the storm of volatile markets to obtain best execution, according to experts at a Pensions & Investments round table. That way, they won't give up valuable alpha to tumultuous market conditions.
“We've actually consulted clients and suggested — and encouraged them strongly, let's say — to step out of doing a particular investment or a transition into a type of asset class ... and wait until the volatility does calm down. And we've been successful in doing so,” Timothy Misik, New York-based head of institutional equity trading at Northern Trust Global Investments, told participants at the round table, held in New York on Feb. 6.
Tal Cohen, senior vice president at Instinet LLC, New York, concurred that “in times like these, yes, you do see a lot of customers pull back, take control and empower themselves, because, generally speaking, the unknown — or anything that's ambiguous — tends to introduce friction cost and is a problematic situation not only for the broker, but the client.”
Also participating in the round table were Ian Domowitz, managing director analytical products, ITG Inc., New York; Brian Hyndman, senior vice president transaction services, Nasdaq Stock Market Inc., New York; Scot Warren, managing director equity products, CME Group Inc., Chicago; and Kyle Zasky, managing director EdgeTrade LLC, Knight Capital Group Inc., Jersey City, N.J.
The six panelists agreed that asset managers should view portfolio strategy and trading strategy as complements in maximizing returns. Asset managers should weigh the impact of difficult market conditions — such as those seen during the hectic week of Jan. 21 when troubled French bank Societe Generale was liquidating $75 billion worth of equity indexes — if they want to achieve best execution for their orders, thus improving portfolio performance.
Mr. Domowitz said volatile market conditions highlight the difficulty in achieving best execution for institutional orders.
But best execution goes beyond volatile markets. “Best execution is in some sense a process, not a price,” said Mr. Domowitz. “What I've observed, though, is that there's a temptation to extend the notion of that process well beyond best execution in the sense of the trade. In other words, we now talk, and some ways very successfully, about how these costs can be taken into account at the portfolio level, but we risk a bit of confusion, dilution of the concept.”
As the head of analytical services at ITG, a global electronic agency brokerage and transaction research firm, Mr. Domowitz has much experience analyzing execution data.