Updated with correction
Equity trading strategies increasingly are being seen through the lens of investment performance, with some sources referring to savings from reduced trading costs as alpha, not unlike what's obtained from excess investment return.
“There are hundreds of measures out there” for transaction costs, said Peter Weiler, executive vice president at Abel/Noser Corp., New York. “The trade data today is so much more robust, even things like fill analysis in milliseconds and microseconds. All of this has improved to the point where we can really pinpoint the short-term alpha sources in how trading is done.”
Such analytic systems are looking at ways to get best execution along with lower costs. And though the basis-point increases can amount to as much as 84 basis points on average, sources said, they can add up to additional millions of dollars when trading large numbers of shares.
That means most money managers aren't looking for home-run hitters in equity trading, said Vincent Ficca, head of equity trading at Eagle Asset Management Inc., an equity and fixed-income manager in St. Petersburg, Fla.
“The goal is to be a singles or doubles hitter,” said Mr. Ficca. “What I want (as a trader) is to solve my portfolio manager's dilemma to put money to work efficiently. I need to understand when to be aggressive, when to back off, and when to change venues.”
Being able to solve that dilemma is made easier through the creation of analytical systems from firms such as Bloomberg LP, Abel/Noser and ITG. Those systems broaden traditional transaction cost analysis, with its focus on volume at a weighted average price, to incorporating a variety of benchmarks to look at the full life cycle of a trade, from a portfolio manager's original order to execution and post-trade.
Michael Falk, principal at Focus Consulting Group LLC, a Long Grove, Ill., money management consulting firm, said knowing where trading costs are coming from makes it possible for money managers to find better ways to execute a trade and pass on the savings to the portfolio and, ultimately, the asset owner.
“The focus has been recently on the active vs. passive issue because of the cost, but they (asset owners) ignore the trading cost,” Mr. Falk said. “Management fees don't include the trading cost. A manager with 10% turnover in a year vs. a manager with 200% turnover in a year — if both charge a 1% trading fee, one is going to be a lot more expensive than the other.”