trade execution and settlement report… · trade reconciliation, affirmation, and settlement...
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TRADE EXECUTION AND SETTLEMENT REPORT
INTECH Investment Management LLC
As of December 31, 2016
2
Overview
The CFA Institute Trade Management Guidelines define best execution
as “the trading process investment management firms apply that
seeks to maximize the value of a client’s portfolio within the client’s
stated investment objectives and constraints.” This definition
recognizes that, among other things, best execution “has aspects that
may be measured and analyzed over time on an ex post basis” but is
“interwoven into complicated, repetitive, and continuing practices and
relationships.”
INTECH’s trade management practices seek to maximize the value of
client portfolios through a trading process that is completely
transparent. This transparency is achieved through the use of a
proprietary trading system that captures and measures the total cost of
trading. INTECH’s practices attempt to remove all conflicts of interest
between parties involved in the trading process, and reward order flow
using quantifiable, objective metrics. By aligning the interests of all
parties involved in the trade process, INTECH is able to focus solely on
seeking best execution for its clients.
INTECH continually invests in personnel and technology in an effort to
improve our capability to deliver superior results. INTECH’s focus and
commitment to the trading and settlement process aims to directly
benefit our clients in the form of low trading costs and high affirmation
rates.
A copy of the CFA Institute Trade Management Guidelines may be obtained at www.cfainstitute.org/ethics/codes/
trade/pages/index.aspx
3
Integral to INTECH’s investment strategy has been the development of
a proprietary trading and portfolio management system. This system
manages all INTECH products including U.S., global, non-U.S. and
emerging markets. This system provides INTECH with a powerful and
robust platform that automates the entire investment process,
producing a paperless, straight-through processing application.
Specifically, the trading system includes:
All the trading rules and data interfaces necessary to implement
INTECH’s investment strategies
All programs and interfaces necessary to electronically
communicate with parties involved in the trade execution and
settlement process
Developed entirely in-house on an open-source operating system, the
trading system provides INTECH with a robust, reliable solution.
Disaster recovery services including backup trading facilities in the
Princeton office ensure a high level of business continuity.
Contents
Trading Cost Overview 4
Trading Cost Components 6
Trading Cost Comparison 12
Repatriation of Dividend Income 15
4
Trading Cost Overview
Trading Costs by Year for All Strategies*
Year Total Shares Total Value
$ Traded
Average
Order Size
as a % of
ADV
Total
Average
Cost
2010 2,985M $88,803M 2.9% 19 bps
2011 2,483M $83,523M 2.9% 21 bps
2012 2,364M $81,257M 3.1% 17 bps
2013 2,436M $84,442M 2.7% 17 bps
2014 2,586M $80,541M 3.0% 19 bps
2015 2,855M $68,038M 2.6% 21 bps
2016 2,621M $67,648M 3.4% 23 bps
2010 2011 2012 2013 2014 2015 2016
19
21
1717
19
21
23
0
10
20
30
40
50
Ba
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ints
*Source: INTECH. Represents rebalancing trading cost for equity or FX on indicated INTECH strategies. Trading costs
are measured as the difference between the decision and execution price of the equity or currency. Data reflects
past performance, which is no guarantee of future results.
5
2016 Trading Cost by Strategy*
2016 Trading Cost by Equity Domicile Region*
Strategy $ Traded Cost % Traded
U.S.-Only $35,866M 15 bps 53%
Global Developed $26,783M 33 bps 40%
Global All Country $4,991M 29 bps 7%
All Others $8M 24 bps <1%
Total $67,648M 100% 23 bps
Region $ Traded Cost % Traded
U.S. $52,657M 19 bps 78%
Europe/Middle East $8,418M 33 bps 13%
Asia Pacific $3,990M 41 bps 6%
Canada $1,611M 66 bps 2%
Emerging Markets $971M 41 bps 1%
Total $67,648M 100% 23 bps
*Source: INTECH. See note on page 4.
6
Trading Cost Components
INTECH’s trading costs can be decomposed as:
Commissions
- Explicit fee paid for brokerage.
Market Impact
- Difference between the decision and execution price, in
the account’s base currency.
- Includes cost of trading equities and FX, if applicable.
Trading Cost Components*
455555545
21 2214 16
12 12 14 16 19
0
10
20
30
40
201620152014201320122011201020092008
Ba
sis
Po
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Commissions Market Impact
*Source: INTECH. See note on page 4.
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Commissions
Based on the most recent analysis performed by ITG, INTECH’s average
commission cost ranks in the 70th percentile in its all developed
markets investment manager peer group.* INTECH has been able to
negotiate a favorable commission structure by building long-term,
mutually beneficial relationships with its brokers.
First, electronic interfaces are established and maintained with each
broker to provide a reliable, efficient method of exchanging trade
information. These interfaces reduce errors and save considerable
time and resources for all parties involved in the transaction.
Secondly, INTECH attempts to balance having too many brokerage
relationships resulting in unprofitable and immaterial business to the
broker, with having too few brokers resulting in insufficient coverage
and diversification. INTECH’s intent is to maintain approximately a
dozen active relationships, with the majority of the order flow directed
to the top brokers.
INTECH does not participate in soft dollar or directed commission
arrangements. By allocating brokerage based on objective and
quantifiable benchmarks INTECH is able to focus solely on seeking
best execution.
Market Impact
INTECH’s methodology for measuring market impact cost is to analyze
the difference between the decision and execution price of the order.
This methodology is designed to capture all components of the cost of
the trade: equity, commission, and FX (if necessary).
Decision price is defined as the market price of the stock at the time
the decision was made to buy or sell. INTECH’s trading system uses the
decision price to calculate the orders necessary to rebalance the
portfolios to their target weights.
*Source: ITG. See note on page 9.
8
Market Impact (cont’d)
Orders are generated and reviewed for reasonableness prior to
release. Once reviewed, an electronic interface is initiated with the
brokers and the order is electronically transmitted. All orders are
released simultaneously, pre-allocated across client accounts, and
include the decision price of each stock. For non-US stocks, the
decision price is comprised of a local equity price and that day’s
London End of Day FX rate to convert that price into the account base
currency. Therefore, both the local price of the equity trade and the FX
rate for each order become the benchmarks for measuring the trading
cost of the executions.
Generally, brokers are given complete discretion as to the timing of the
executions, with the stipulation that the entire order be completed in a
single trading day. For global/international orders, brokers are also
directed to execute the FX transactions necessary to settle the equity
trades. INTECH requires its brokers to execute one net FX transaction
per account, per currency, per settlement date.
Executions are reported back to INTECH in an electronic format similar
to the order file. Brokers allocate equity trades across accounts with
the average executed price expressed in the local currency, and, where
necessary, the average FX rate executed to settle the trades. INTECH
ensures that each order was properly allocated, including a verification
that the equity and FX executions were average priced across all
accounts, ensuring all clients are treated equally.
The execution price is then compared to the original order price for
purposes of calculating market impact. That cost can then be
decomposed into both the cost of the equity and the FX trades on
global orders.
The process INTECH uses to measure and monitor the quality of
executions is intended to not only be transparent and objective, but
also to align the interests of INTECH's clients and its brokers. The
measured total trading cost, which includes market impact,
commissions, and FX, is used as the basis for allocating future order
flow among brokers. Since INTECH does not participate in soft dollar or
directed commission arrangements, brokers are motivated to focus
solely on minimizing the execution cost of every trade.
9
INTECH’s investment process also contributes to minimizing market
impact in that it requires only incremental trading of very liquid, large
capitalization stocks. An analysis of INTECH’s average order size in
shares and as a percent of the stock’s average daily volume (ADV)
illustrates this point.
Average Order Size (in USD) for All Developed Markets*
% of Average Daily Volume for All Developed Markets*
2016 Trading Costs by % of ADV**
INTECH 25th Percentile Median 75th Percentile
3% 15% 65% 123%
INTECH 25th Percentile Median 75th Percentile
$613,000 371,000 658,000 1,009,000
* Source: ITG. Results based on one-year period ending December 31, 2016. Most recent results based on analysis
versus an all developed markets peer group of 35 investment management firms, encompassing a total trade
value of USD 838 billion. Number of managers and trade values for other periods are different and available upon
request. Additional information about ITG can be obtained from its website at www.itg.com.
** Source: INTECH. See note on page 4.
Data reflects past performance, which is no guarantee of future results.
% of ADV % Traded Cost
>8% 10% 44 bps
4-8% 15% 33 bps
2-4% 20% 25 bps
1-2% 20% 21 bps
<1% 35% 13 bps
Total 100% 23 bps
10
Trade Reconciliation, Affirmation, and Settlement
INTECH's proprietary trading system also augments and automates the
trade settlement process by connecting electronically with all
interested parties in the trading and settlement process. By automating
this reconciliation, INTECH has designed a straight-through processing
system that dramatically reduces the possibility of unaffirmed trades or
other disagreements in trade instructions that may cause trade breaks.
Once trade executions are complete and trade reports have been
electronically received from each broker, the trading system verifies
that all orders have been filled completely and correctly. Relational
edits within the system ensure that each broker correctly calculated
the fees, taxes, levies, and commissions for each individual equity
transaction. INTECH has established a consensus with its brokers on
these calculations, including details about rates, rounding rules, and
settlement conventions for each market where INTECH trades. Global
portfolios have additional checks to verify all details of net FX trades for
each currency, side, and settlement date. This clear and automated
process for computing and verifying trade details empowers INTECH to
tie out both equity and FX trades to the nearest penny in every local
currency with zero tolerance for error.
After completing this verification process, the trading system
electronically generates trade instruction files that will be delivered to
brokers, custodial banks, and central clearing facilities (such as
OMGEO/DTC in the U.S.). These instructions are matched against
broker confirms and affirmed on trade date if all data matches. Any
exceptions are reviewed by INTECH on the morning of T+1 and
generally resolved by noon that day.
This in-house technology, which was first developed and implemented
in 2000, has allowed INTECH to achieve affirmation rates better than
the industry average. For example, during the month of December
2016 this system assisted INTECH in consistently affirming 100% of
over 13,000 domestic trades on a T+1 basis. While international
securities do not have a single clearing house or affirmation engine
analogous to OMGEO/DTC, INTECH's rigorous reconciliation process
addresses the majority of potential issues before they have the chance
to cause any settlement problems. In December of 2016, INTECH
matched its brokers on every detail of over 11,000 global trades on a
trade date basis, ultimately resulting in a successful settlement rate of
over 99.9%.
11
Affirmation Rates vs. Industry (December 2016)
100%100%100%
91%90%
69%
0%
20%
40%
60%
80%
100%
Trade Date T+1 T+2
INTECH Industry
Affirmation rates obtained from the Omgeo ID Trade Input/Affirmation Analysis Report for December 2016.
12
Trading Cost Comparison
INTECH’s commitment to trade execution has resulted in trading costs
that are lower than other large-cap investment management firms.
INTECH hired ITG, a leading trade cost consultant, to perform a trading
cost comparison with its peers. ITG’s methodology for evaluating
trading cost is similar to the one used by INTECH, measuring impact
cost as the difference between the price at which the broker receives
the order and the execution price. This methodology, known as total
implementation shortfall, analyzes the change in market price due to
supply/demand imbalances caused by the presence of the order.
As the following analysis shows, INTECH’s total trading costs are lower
than the median large-cap investment management firm.
Total Trading Cost vs. Peer Group - U.S.*
* Source: ITG. Most recent results based on analysis versus a large-cap peer group of 35 managers encompassing
a trade value of USD 552 billion. Number of managers and trade values for other periods are available upon request.
2012 2013 2014 2015 2016
5th Percentile 62 84 49 74 91
25th Percentile 41 44 39 41 51
Median 24 27 26 23 40
75th Percentile 11 12 11 8 17
95th Percentile -4 -6 0 1 4
INTECH 13 13 13 12 15
Percent Rank 70% 70% 69% 66% 83%
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*Source: ITG. Most recent results based on analysis versus a ACWI ex U.S. peer group of 35 managers
encompassing a trade value of USD 378 billion. Number of managers and trade values for other periods are
available upon request. Number of managers and trade values for other periods are available upon request.
Total Trading Cost vs. Peer Group - All Countries ex U.S.*
2012 2013 2014 2015 2016
5th Percentile 93 123 85 109 85
25th Percentile 67 65 60 64 51
Median 48 46 40 52 38
75th Percentile 27 27 19 25 17
95th Percentile -25 -2 -23 5 5
INTECH 19 22 21 22 27
Percent Rank 83% 79% 67% 78% 62%
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*Source: INTECH. See note on page 4.
FX Trading to Facilitate Equity Settlement
Typically, INTECH manages the FX trading necessary to settle equity
trades made during the implementation process, leaving no residual
local currency balances. Brokers trading global equities are instructed
to perform one net FX trade per account, per currency, per settlement
date to/from the local currency of the equity trades to the account’s
base currency. Because of the netting by currency, and the fact that
the U.S. represents a large portion of most global portfolios, the total
value of FX is significantly smaller than the equivalent global equity
trades.
2016 Notional Value Traded*
Pair % of Total Notional (USD
Equivalent)
EUR/USD 19% $1,405M
USD/DKK 17% $1,216M
GBP/USD 10% $720M
USD/JPY 9% $631M
USD/CAD 8% $596M
All Others 37% $2,726M
Total 100% $7,293M
15
Repatriation of Dividend Income
INTECH now offers a solution to those clients who desire for their
manager, and not their custodian, to administer the FX trading
necessary to repatriate local currency balances to the base currency of
the account.
Foreign currency balances can also accumulate due to corporate
action events such as dividends. If explicitly directed by the client,
INTECH will manage the currency trading necessary to convert local
currency balances to the base currency of the account on a periodic,
aggregate basis.
For such accounts, INTECH monitors the local currency balances on a
daily basis, and determines if such balances have reached a level
necessitating an FX trade. De minimis thresholds for each account will
be initially established and regularly monitored for appropriateness.
Thresholds will be determined based on the strategy and base currency
of the account, as well as any applicable custodial charges.
INTECH will execute the FX transactions through its existing
international brokerage relationships, utilizing existing systems and
procedures in place.
FX transactions to repatriate dividend income will be executed at the
London end of day FX rate (EOD). The EOD rate is widely recognized as
the benchmark for calculating daily performance of global indexes, is
easily verifiable and encompasses plenty of liquidity.
INTECH Investment Management LLC
CityPlace Tower
525 Okeechobee Boulevard, Suite 1800
West Palm Beach, FL 33401
561-775-1100 Fax 561-775-1168
intechinvestments.com
C-0217-1740 01-30-18
INTECH is a Janus Henderson Group company