itg tca - koscom seminar march 2013

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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S btitl


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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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S btitl


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Subtitle

A delicate Balancing Act - Case Study 1 (Cont.)

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S btitl


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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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Subtitle


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SubtitlePre Trade Analysis

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Subtitle


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SubtitlePre Trade Analysis

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Subtitle


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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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itg tca - koscom seminar march 2013

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