In a U.S. market that has evolved from a simple format in which two exchanges accounted for 75% of all equity trading volume to a complex structure composed of no fewer than 13 public stock exchanges, more than 30 alternative trading systems (ATS), and a host of dark pools, investors are becoming increasingly reliant on the emerging practice of venue analysis.
In venue analysis, traders compare the execution characteristics and results of trades on a given venue against the prevailing market data before, during and after a trade. A new report, Venue Analytics: Routing a Path to Best Execution, from Greenwich Associates analyzes the role venue analysis is playing in institutional trading and presents the results of a special study on the topic.
See related story: Conditioning Venue Analysis
Although most of the institutional investors participating in the study use functionality provided by their transaction cost analysis (TCA) systems as their primary tool for venue analysis, some investors use special venue analysis data provided by their brokers, and others have developed in-house tools of their own. While there is still no firm consensus on what metrics should be included in venue analysis, a majority of traders and all TCA specialists, agree that venue selection should take into account the intent or type of order (e.g., passive, aggressive, midpoint, conditional).
Most traders, however, lack functionality to allow them to complete this type of analysis, and overall satisfaction levels with current venue analysis capabilities are mixed at best. There is a real opportunity for vendors to develop robust, intuitive tools that will enable all traders to perform sophisticated venue analysis, said Richard Johnson, Vice President of Greenwich Associates Market Structure and Technology, and author of the new report.
Venue Analysis Critical to Best Execution
New regulations like MiFID II and the SEC Transaction Fee pilot will further increase the profile and importance of venue analysis by tightening up rules on best execution. Metrics derived from venue and routing analysis are now being incorporated into asset managers best execution review process, says Richard Johnson.
