Executive Summary
In the highly competitive, commoditized US equity markets, levels of automation are continuously reaching new highs. Every week there are new superlatives – e.g., highest numbers of quotes, smallest trade sizes, lowest latency numbers, smartest software, most competitive algorithms. The wealth of information that must be consumed daily is overwhelming, as is the speed at which it is being delivered. The increasing automation of the markets is forcing fragmentation, acceleration, and the transition to data and technology dependence.
As electronic trading becomes more pronounced and market participants expand their product and geographical reach, there is a new type of risk that firms will be analyzing: execution risk. This is the risk of not being able to get to the market before the market moves away from the level at which the firm needs to trade. Execution risk plays an important role in overall risk management. As a means of protection as well as a source of profit, risk management must match the increased complexity of the marketplace as well as reflect the immediacy of the trading.
Sell-side firms are racing to develop strategies and tools that allow them to improve, measure, monitor, and better control every part of the process. They are seeking to reduce risk through a combination of more accurate data, faster processing, comprehensive views of the marketplace, shared data, and the ability to anticipate problems. Execution risk has many contributing elements, and it will be the end-to-end capabilities that make for its reduction. Those who manage it well will have superior execution capabilities and better risk management that is reflected across the organization, which will afford them greater trading opportunities and higher profitability.
You can buy the report from Tabb Group, or read an article over at Trade News which talks to the author, Miranda Mizen.
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