Why we disclose Order Execution Quality
- Requested vs. Fill Price
- Round-trip latency
WYSIWYG – How to assess execution quality?
One of our PB relationships, the LMAX Exchange, recently published an interesting (and brainy!) white-paper on how to assess execution quality. Their insight is that spread is but one of 5 elements to assess:
- Fill ratio: what good is a tight spread if you don’t get filled?
- Price variation: what if you’re slipped asymmetrically?
- Hold time: on technically possible vs. actual latency…
- Market impact: how deep is the market? You might also want to watch our recent divergence webinar!
- Bid-offer spread: all the above prove that this is not the be all and end all!
Collective execution quality
- 87% of trades fill within 0.1 pip of the advertised Top of Book
- The distribution isn’t fully symmetric. So our LPs are crooks? Don’t shoot them just yet!
- We measure slippage vs. advertised 10 lot Top of Book – because 90%+ of trade requests are within top of book depth. It’s therefore “normal” / “fair” that orders of 10+ lots incur slippage
- Most strategies trade the trend – e.g. systematically buying a rising market yields asymmetric, but “fair” fills – watch the “Price Variation” LMAX video above – which again stresses the importance of “Hold time”
How does volume impact fills?
Distribution of slippage vs. lot size
- The blue columns on the Y Axis plot the frequency of any given slippage outcome
- The X Axis labels slippage, measured as fill price – request price (negative means customer got worse than Top of Book stream)
- The Red series shows the average size (in lots) of trades in each slippage bucket
E.g. for all trades exceeding the advertised Top of Book depth
- 45% odd of all trades larger than 10 lots filled at the advertised bid or offer
- 5% odd slipped positively
- 2 out of 3 filled within 0.1 pip of target
- 7-8% odd were slipped worse than -0.3 pips from request, etc.
The way forward for global FX
- Mifid2 reinforces best-execution and all venues now report fills to centralised order repositories – watch this space for better rights for customers
- ESMA might take the opportunity to slay the CFD dragon for good from January 2018
- Many firms voluntarily adhered to the FX Code of Conduct
- Powerful forces in the buy-side now lobby for the end of last-look