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big xyt Partners with Baillie Gifford to Launch Portfolio Liquidity Analysis Solution for Dilution Levy Calculation

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big xyt, the independent data and analytics solutions provider, has launched a new tool to automate the process of dilution. The Portfolio Liquidity Analysis solution, developed in collaboration with Baillie Gifford, is designed to enhance buy-side firms’ understanding of equity portfolio liquidity and to address the forthcoming industry guidance on the application of dilution levies.

Investment managers impose a dilution levy when managing the cash flow of pooled investment funds. This fee is charged to protect all investors in the fund by ensuring that each is treated equitably. It also helps to reduce the effect that large cash inflows or outflows may have on the fund’s asset values, which can cause price fluctuations.

big xyt’s new tool helps investment managers ensure fair treatment of clients and mitigates the impact of cashflow-related price volatility, by providing an automated, data-centric method, using robust market data, for applying dilution levies in order to safeguard the interests of existing shareholders and maintain the integrity of fund holdings.

Talking to TradingTech Insight, Mark Montgomery, Head of Strategy and Business Development at big xyt, describes a typical use case. “Say for example a large investment manager is running a billion dollar fund, 10% of which is owned by a pension fund that decides it wants to go into cash. If you suddenly remove $100 million from a $1 billion fund, the holders of the remaining 90% will probably be hit by some sort of market impact, even if the trade is done in a fairly passive way. So the dilution levy – in theory – replenishes the remaining fund holders for the cost of that market impact.”

By generating a realistic ‘denominator’ for the dilution calculations, which considers only accessible liquidity, the solution ensures that accurate dilution charges are applied. It also minimises the risk of data leakage that could occur when sharing information with traditional cost estimate providers, such as banks and brokers.

The solution offers interactive dashboards and customisable views, and the market data model is calibrated with actual trading data to ensure responsiveness and accuracy under varying market conditions.

“In order to do these calculations, we pull data from various relevant sources,” says Montgomery. “We look at portfolio holdings, the change overnight, some sort of pricing valuation, currencies, and all the numbers we get from the marketplace. Then we pull it all together and apply it in a dashboard that can look at a single portfolio or multiple portfolios or by region. We’ve also built back-end testing dashboards, so that at times of stress, which is when you most need automation, the information is there at your fingertips.”

Baillie Gifford, who contributed to the solution’s development, was the first client to use it in production. The Portfolio Liquidity Analysis tool is now being made available to other clients as part of part of big xyt’s Open TCA suite.

Adam Conn, Head of Trading at Baillie Gifford, commented: “The partnership with big xyt was a collaboration between our trading and operations teams. Our aim was to create a robust dilution adjustment and a threshold process for large deals, that is in the best interests of our clients, with high regulatory standards.”

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