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Execution Quality in Equities Markets

1 December 2008. Execution Quality in Equities Markets. Octavio Marenzi Paris. A member of the Oliver Wyman Group. CONFIDENTIAL | www.oliverwyman.com. Major measures of execution quality include price, speed, and fill rates.

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Execution Quality in Equities Markets

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  1. 1 December 2008 Execution Quality in Equities Markets Octavio MarenziParis A member of the Oliver Wyman Group CONFIDENTIAL | www.oliverwyman.com

  2. Major measures of execution quality include price, speed, and fill rates • Price – average price at which order is executed, typically compared to price on the reference exchange or consolidate tape at time the order is received • Speed – elapsed time between when an order is received and is executed. Not to be confused with messaging speed from a technical perspective, but from the perspective of filling the order. • Fill rate – likelihood that a particular order will be filled at an execution venue. Some venues have very high fill rates, but only average prices, most venues that seek to achieve price improvement, such as mid-point fills, tend to have lower fill rates.

  3. National best offer Level of price improvement Price achieved by market center Effective Spread Quoted Spread Mid-point National best bid Measuring the quality of execution price… At the quote: the execution venue obtains the same price as the public markets, i.e., the NBBO is matched. While the NBBO is the best quote available on public markets, investors are not guaranteed that they will be able to actually obtain those prices. In the seconds that the order takes to work through the system, the NBBO could have moved, or hidden orders in ECNs could lead to execution at a different price. Price improvement: the execution venue actually obtains a better price than the NBBO. The frequency with which a firm is able to obtain price improvement for its clients, as well as the level of price improvement, are important measures of execution quality. Price disimprovement: when an order is executed at a price inferior to the NBBO, it is referred to as being outside the quote, or alternatively as “price disimprovement.” Obviously, this is undesirable, but it does happen with surprising regularity.

  4. Value ranges for effective-over-quoted spread…

  5. Applying this methodology to the US equities markets… • Source of data SEC-mandated Rule 605 execution quality reports • Number of issues 11,160 • Cumulative count of shares across all orders 3.1 trillion • Number of orders 8.5 billion • Cumulative number of shares executed 356 billion • Number of market participants 138

  6. Market share for US market centers

  7. NYSE ArcaEx provided executions for the largest number of issues…

  8. Speed variations are visible across types of execution venues….

  9. Market makers tend to offer price improvement frequently in order to attract order flow. Exchange specialists, on the otherhand rarely provide price improvement…

  10. Speed ranking – large marketable limit orders for 100 most liquid stocks

  11. Execution Speed Execution Speed NYSE Large Market Orders Nasdaq Large Market Orders Issues Outside of 500 Most Active Issues Outside of 500 Most Active BATS Trading 0.07 ArcaEx 0.26 Spear Leeds & Kellogg 0.36 Bloomberg Tradebook 0.47 Wagner Stott Bear 0.56 Goldman Sachs 0.80 PSG 0.68 Direct Edge ECN 1.58 La Branche Wachovia 0.81 2.61 Pershing Van der Moolen 1.18 3.29 Better Better Deutsche Bank ArcaEx 1.48 3.48 UBS Securities Direct Edge (ADF) 3.74 1.70 Madoff 4.09 Banc of America Specialist 1.78 Knight 7.46 Madoff 2.37 Worse Wors Citadel Derivatives 8.06 UBS Securities 2.53 e ATD 8.31 Pershing 4.67 Citigroup 8.83 ATD 7.34 E*Trade 9.49 Citadel Derivatives 7.34 Morgan Stanley 11.05 Knight 8.92 Merrill Lynch 23.23 Merrill Lynch 17.36 JP Morgan 28.34 E*Trade Cap Mkt 19.11 BIDS Trading 173.98 NYFIX 87.13 Instinet 186.47 BIDS Trading 106.77 NYFIX 224.11 Instinet 115.41 0 50 100 150 200 250 0 20 40 60 80 100 120 140 Speed of Execution (seconds) Speed of Execution (seconds) Electronic order books provide the fastest executions, while some ATSs offer far slower execution speeds as they search for price improvement opportunities…

  12. The market centers offering the best prices, frequently are the ones with the slowest speeds…

  13. Heatmap for small market orders for Nasdaq issues…

  14. Clustering of electronic order books

  15. Overall ranking for Nasdaq stocks…

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