Michael Richter, global head of product for trading analytics at S&P Global Market Intelligence, shares his insights on why the company’s new range of TCA tools will be a gamechanger for futures traders.
S&P Global has provided sophisticated best execution and TCA tools since 2011 across a wide range of asset classes including equities, bonds, bank loans, money markets, FX and OTC derivatives – and now, the firm is taking one step further, with the development of its new TCA toolset covering the futures markets, following its transformative merger with IHS Markit in February 2022.
With the evolution of market practice and the ever more stringent approach towards financial regulation, scrutiny around best execution has never been higher. No longer just looking at the best available price at any one point, the process now involves a far more holistic approach to the entire investment process – and requires appropriately sophisticated tools to enable traders to measure and manage highly complex trades in order to benchmark and improve performance.
Market demand
First off, why is such a toolkit needed? Key trends and feedback from the buy side suggest that there has been an increase in the amount of futures trading that is occurring across the industry, with the growth driven by increased market volatility and rising interest rates. This has correlated with a significant demand for the buy side needing to have an automated, independent third party measuring their execution quality in this asset class.
“A lot of institutions were manually running their futures TCA,” explained Richter. “The feeling was that this wasn’t a scalable option and there was a belief that ‘marking their own homework’ was not an optimal way of running regulatory best execution analyses.”
Improving performance
So what does the new S&P Global Market Intelligence Futures TCA toolkit bring to the table, and how does it combine market data with trade data to produce reliable metrics to help the buy-side community perform better?
“We use the timestamps and other relevant information available in a client’s trade data to find the corresponding trade and nearest quote on market data. The metrics we produce allow buy-side institutions to compare broker performances and assess any inefficiencies in trading,” said Richter. “This is done by providing buy-side institutions with a break-down of both implicit and explicit costs of trading. By choosing the right trading partner buy-side institutions can reduce their trading costs and thus improve the returns on their portfolio.
A work in progress
“Futures and options trading as we know has become increasingly electronic in recent years. As with equities, the proportion of algorithmic orders has gradually increased over time, and basic algo types such as the VWAP, TWAP and POV have proliferated in the market. We will be building out metrics and benchmarks to measure the trading costs when such strategies are utilised.”
The tool was developed in response to market demand for TCA on listed derivatives.
“Derivatives are being used more and more in the industry whether for hedging purposes or liquidity purposes. The tool is yet to be launched, but as we were designing the tool we had multiple discussions with our ‘design partners’ to understand their requirements, which are a proxy for the industry. Once launched, we will continuously monitor the effectiveness of the tool for our clients and use their feedback to evolve the offering.”
Cost efficiency
The development of the new toolkit did not come without its own challenges, however, as the futures market has its own characteristics that make it highly unique. Unlike cash equity markets, for example, the derivatives markets have less transparent trading sessions, making it more challenging to design market Open/Close/Full Day VWAP type metrics. “The biggest challenge is knowing how derivatives instruments trade, the nuances of the market and the microstructure of the market,” agreed Richter.
The plan is to utilise the new toolkit to aid and encourage the buy side to more efficiently manage their TCA process – something that has in the past been, perhaps, somewhat under-used, especially in futures trading strategy.
“As S&P Global Market Intelligence TCA does for every new asset class we cover, we will aid our futures TCA clients to manage the best execution process with broker-neutral analysis and reporting, improve execution quality during the trading lifecycle by measuring broker and venue effectiveness, and optimize alpha by understanding the cost of the investment process,” explained Richter.
Best execution
So how will the tool help the buy-side to truly achieve/improve best execution?
“The solution will help the buy side firstly demonstrate a process of best execution across this asset class. Providing them with reporting and monitoring functionality as prescribed in the regulation. Secondly the solution is there to provide actionable insight. That could be identifying key cost drivers and trends on counterparty execution quality, to monitoring trends in outliers, to market timing,” said Richter.
“The offering is being developed based on our experience building the other asset classes. We were one of the first providers in the TCA space over a decade ago, and are still regarded as one of the top tier TCA providers. This offering will only add to our repertoire of asset classes and make the product offering more appealing to clients looking for a true multi-asset TCA.”
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