The efficacy of venue analysis in equity trading has been debated in the U.S. for some time. At the heart of this debate, traders must consider:
- Will suboptimal venue selection and routing clearly show up in the transaction cost analysis?
- Are there other warning signs that venue analysis is needed or that an algorithm requires some fine tuning with its venue placement?
While poor venue strategy might not be clear from a traditional post-trade transaction cost analysis, there are steps traders can take to uncover problems. To that end it is worth understanding:
- the causes for sub-optimal broker venue strategy
- the type and depth of reporting, and the patterns in these reports that signal potential issues
- how to follow-up with brokers about necessary modifications to improve your trade performance
In a new paper published in the Journal of Trading, Marie Konstance from Bloomberg’s EMSX Trading and Analytics team examines the different approaches to venue analysis. Konstance unpacks the debate between those who believe suboptimal venue selection and routing manifest in standard transaction cost analysis (TCA) and those who feel only an exhaustive analysis will do — examining some of the issues that can arise when relying solely on TCA to determine if venue analysis is necessary. “Approaching Venue Analysis” also provides readers with several metrics useful in identifying and evaluating issues with venue selection by brokers.