The leading knowledge platform for the financial technology industry
The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

BestEx Research System Offers Continuous TCA Review to Reduce Implicit Costs

Former AQR trading chief Hitesh Mittal’s new BestEx Research Group has launched its multi-asset trading system with a strong emphasis on best execution and lower trading costs. The new platform features a back-testing platform, broker-neutral transaction cost analysis (TCA) and sophisticated execution algorithms, which will be made available to more than 500 fund managers via partnership with agency broker Abel Noser.

According to Mittal, the platform’s TCA system has been designed to measure and continuously reduce transaction costs by attributing them to every aspect of the orders handled by an algorithm, such as venue, timing, size, price, and order type. BestEx’s simulation platform analyses months of tick data to assess algorithm behaviour in accordance with the exact rules of each exchange, thereby eliminating the trial-and error-approach typical of many market offerings.

The solution also features a web dashboard that provides transparency and control over algorithm behaviour. Using these capabilities, BestEx Research’s consultants work with clients to further customize their high-performance execution algorithms for a best fit with each portfolio manager’s unique alpha and risk profile.

Moving to a new model

Mittal says that in the US implicit costs in the asset management sector are extremely high due to bundling of services from banks and brokers, with execution algorithms being used as a cash register rather than a point of differentiation, and ongoing conflicts of interest. Due to these market issues, many buy-side firms find themselves being effectively forced to trade with a small number of banks and brokers.

Says Mittal, “It’s an oligopoly of a sort. And as a result, what happens is that basically there are no choices for the active managers, they have to execute with them.” Mittal claims that the implicit costs that result could be, for a global macro firm, between 4%-5% in slippage costs a year. For a small cap manager, these costs could be 3.5% per year.

At the moment, says Mittal, only the top hedge fund managers have been able to build their own algorithms, breaking out of the trap of implicit costs. “BestEx Research is sort of the market solution for what a top few hedge funds have been able to do,” he says, “to minimize slippage, to build really high-performance execution algorithms, but provide it in a broker-neutral model. Which basically means that our customers can get that algorithmic trading solution. They don’t have to build it themselves, nor do they have to rely on 10 different banks’ execution algorithms.”

TCA is also integrated into the platform. Says Mittal, clients “don’t need to hire another TCA vendor to figure out what the implicit costs are. Our TCA platform is completely integrated with our algorithms, which goes way beyond just telling them what the overall slippage is. It actually tells them why the slippage is what it is, and what they can do about it.”

Mittal says he has been building the platform for three years for a single client and is now officially launching it to the wider market, alongside the Abel Noser news. Says Mittal, “We’ve been live now for four months and we are signing up quite a few large systematic managers, hedge funds, and active funds.”

Mittal says he believes that although the “broker-neutral model has different implications for different asset classes, I believe that is how the market is going to be in five or 10 years from now – that execution algorithms may be decoupled from the banks. They will still be the ones providing liquidity and providing access to the markets, but they will not be the ones providing the execution algorithms because there is too much conflict [of interest] is real and there is too much slippage costs for buy-side managers, and I think they are going to be very, very focused on them.”

Related content

WEBINAR

Recorded Webinar: MiFID II: Data for best execution

Don’t miss this opportunity to view the recording of this recently held webinar. Markets in Financial Instruments Directive II (MiFID II) strengthens the best execution requirement embedded in MiFID by expanding disclosure. Among the directive’s requirements are provisions to ensure investment firms provide appropriate information to clients on their order execution policy and publish a...

BLOG

Raidne Goes Live with Siren FX Benchmark

London-based Raidne has gone live with the first client for its recently launched Siren FX fixing benchmark. The quantitative FX surveillance says the independent benchmark – which was designed to offer an alternative to established fixes that have been subject to market manipulation – is being used by a European asset manager, executing through a...

EVENT

TradingTech Summit Virtual

TradingTech Summit (TTS) Virtual will look at how trading technology operations can capitalise on recent disruption and leverage technology to find efficiencies in the new normal environment. The crisis has highlighted that the future is digital and cloud based, and the ability to innovate faster and at scale has become critical. As we move into recovery and ‘business as usual’, what changes and technology innovations should the industry adopt to simplify operations and to support speed, agility and flexibility in trading operations.

GUIDE

MiFID II handbook, third edition – How compliant are you?

Six months after Markets in Financial Instruments Directive II (MiFID II) went live, how compliant is your organisation? If you took a tactical approach to cross the compliance line on January 3, 2018, how are you reviewing and renewing systems to take a more strategic approach and what are the business benefits of doing so?...