Best execution and transaction cost analysis (TCA) have been critical components of equities trading for years but were still considered nascent in the crypto market – until recently. Greg Tishelman, director of crypto sales at OneMarketData, explains to BEST EXECUTION the challenges (and opportunities) of applying data analysis to digital assets.
The rapid growth in the crypto market and corresponding rise in novel and increasingly sophisticated trading technology targeted at crypto has made traders recognize they need new ways to optimise their crypto trading strategies, ensure regulatory compliance and achieve better results for their clients and firms.
The evolution of best execution
Best execution (best ex) refers to the process of executing trades at the best possible price and with minimal slippage. An important factor in achieving best execution is order routing, where traders decide where to route their orders when they place the trade to get the best possible execution. This may involve splitting orders between multiple exchanges or trading platforms to take advantage of the best prices and liquidity available.
Before best ex was introduced, traders would buy and sell securities in the financial markets and focus on executing those trades quickly and at the best price possible – often without considering the factors that could impact the quality of that trade. Traders would frequently rely on their personal experience/ judgement and other limited information to decide how to execute trades. This was often an opaque process as most traders had limited visibility into how their orders were being executed, at what price and whether they got the best execution for their trade.
The emergence of best execution regulations made it mandatory for traders to consider speed, price, likelihood of execution and more when completing a trade. And as the industry strove to deliver more transparency and accountability into financial markets, it led to a new era in the development of sophisticated trading algorithms.
Best ex meets the crypto trader
Crypto traders today recognize the value in taking Best Ex best practices from the equities trading world and adapting them to the unique characteristics of the crypto market. But crypto traders also must consider a range of different factors when it comes to best ex, including liquidity, trading volume, bid-ask spreads and market volatility. They also must navigate a host of algorithmic trading tools that can help them execute trades more efficiently, analyse market data, identify trading opportunities and execute trades quickly and accurately.
Crypto markets by nature are decentralized and volatile – and that’s just one reason why best ex has emerged as so critical in this space. Crypto traders may need to execute trades quickly to take advantage of price movements while ensuring they secure the best possible price and avoid slippage – and best ex allows them to reduce the impact of market volatility on their trades by ensuring their orders are executed at the best possible price. This allows them to minimize the risk of losses due to price fluctuations, improve the overall profitability of their trading strategies and help avoid conflicts of interest by ensuring that orders are executed fairly and transparently – without undue influence from brokers or other market participants.
A new level of insight: Transaction cost analysis takes centre stage
Transaction cost analysis (TCA) is a method of evaluating the costs associated with executing a trade and is commonly used in traditional equities trading to evaluate the cost of buying and selling securities. Crypto traders have quickly realized how valuable this can be to them. With TCA tools, crypto traders can identify the sources of costs associated with executing trades, such as bid-ask spreads, market impact and order routing fees.
TCA is particularly beneficial to crypto traders due to the unique characteristics of the market, specifically:
- High volatility, which can have a significant impact on trade execution costs. TCA can help crypto traders identify the impact of volatility on their trades and adjust their strategies accordingly.
- Low liquidity, which can make it difficult to execute trades at the desired price. With TCA, crypto traders can identify sources of liquidity and associated execution costs to help optimise trading strategies.
- Fragmentation due to multiple exchanges and trading platforms operating in different regions and with different liquidity profiles. Crypto traders can leverage TCA to evaluate execution quality across different venues and pinpoint the best places to route their orders.
- Lack of regulation and no universal standard for what constitutes best ex. TCA offers the means to evaluate execution quality based on a trader’s own criteria and objectives to achieve the best possible outcome for their trades – and clients.
Historically, the challenge in applying TCA to crypto trading was the lack of standardised data. With equities trading, trading data is typically available from a centralized source – but crypto trading data is often spread across multiple exchanges and platforms, making it difficult to aggregate data and perform meaningful analysis. However, with the growth of cloud computing and data analytics, it has become easier and more affordable for crypto traders to collect and analyze large amounts of data. Data analytics tools have become more powerful, with machine learning algorithms that can quickly analyze large datasets and identify patterns and trends.
These advances in data analytics technology have made it easier for crypto traders to perform TCA. Traders can now collect and analyse large amounts of data from multiple sources, including trading platforms, market data feeds, and blockchain data. This has made it possible for crypto traders of all sizes to use TCA to improve their trading performance, reduce costs, and comply with regulatory requirements.
The road to institutional adoption
The crypto market continues to mature – and with that comes increased scrutiny from regulators, media and institutional investors. It’s imperative that crypto traders embrace the requisite tools to better navigate the decentralised and often volatile nature of these markets, clearly demonstrate best execution and deliver the transparency that market participants will demand. Only when they can enhance trading results, mitigate risks and ensure regulatory compliance will they establish the trust necessary for the institutional community to fully embrace this rapidly evolving market.
©Markets Media Europe 2023
