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Edwin Scheffers

We keep our trading costs low

05-01-2016 | Insight | Edwin Scheffers The Robeco Trading Desk executes around 22,000 quantitative equity orders a year. Robeco has traders in three different time zones around the world (Rotterdam, Boston and Hong Kong). This live presence enables us to monitor the executions closely and react immediately on price movements in stocks. “We keep our trading costs low through a combination of factors – low execution commissions, local presence in all time zones, long average trading experience of our traders, an extensive broker list and the use of dedicated Cash and Algo/PT traders.” says Edwin Scheffers.

For which departments are trading costs a consideration?
“Trading costs are not only a consideration for our Trading Desk. Quantitative Research uses its own Robeco Expected Trading Cost Model to calculate costs before a trade is executed. It is used for all emerging market equity transactions and takes the implicit and expected trading costs into account, including taxes and bid-ask spreads. This pre-trade information is used to construct portfolios and plan trades. But the best way to cut trading costs is to avoid expensive trades altogether.”

“We have built our own model because we were not satisfied with the existing third-party solutions. These models typically assume standard trades in terms of size, timing and location that substantially differ from our actual trades. Our model has been calibrated with over 60,000 Robeco trades over multiple
years, making it more accurate. Another advantage of having an in house model is speed. Our model is fully integrated; while using third-party models involves the cumbersome procedure of uploading potential trades, downloading the output and uploading and processing the output back into Robeco’s systems. The time to market would suffer greatly as a result.”

How do you determine whether you add value for clients?
“Our equity trades are systematically analyzed by our external TCA (Transaction Cost Analysis) provider ITG (Investment Technology Group). ITG looks at commissions and market impact, comparing the performance of traders and broker-dealers against a defined benchmark. This data is provided both on a daily and quarterly basis.”

“ITG data shows that we are adding value to our trades. In terms of market impact Robeco added value of 1 bp for developed markets and 7 bps for emerging markets compared to the estimated trading costs calculated by ITG. Our strong results are partly due to our large network of 75 brokers, giving us access to a lot of liquidity. ”In 2014 our commissions for developed quant equity trades were around 4 bps lower than those of our peers, and 9 bps lower for emerging markets. The average commission we pay has fallen every year.“

“The daily ITG data is vital as it gives immediate feedback on how well a trade is executed and on our traders’ performance. Most days our equity traders don’t leave their desks for more than a few minutes at a time, they eat their lunch in front of their screens. This ensures that they are constantly aware of the status of any open order and of
market developments that may affect its execution.”

How do you execute trades?
“The Trading Desk processes a large volume and wide range of orders and focuses on best execution and fair allocation. Portfolio managers and traders cooperate on the best execution strategy of a trade, but there is a strict division of responsibilities. Portfolio managers can’t execute trades and traders can’t initiate or create orders.”

‘We do not pay for broker research’

“The equity orders are entered into Charles River, our order management and compliance system, which sorts them into different blotters based on liquidity, value, spread and special instructions. Our traders check the proposed execution method and also any additional instructions from the portfolio manager. The two most common order types are ‘market’ orders, where we aim to achieve the best possible price from the moment we receive the order at the desk, and ‘market on close’ orders, where the order should be executed at a better price or as close as possible to the closing price of the day. The most suitable execution strategy is determined by the order instruction from the portfolio manager and any additional instructions.”

What are the execution strategies?
“We use three common trading techniques:
  • Algorithmic, usually abbreviated to ‘Algo’ – orders for liquid stocks, often in developed markets that arrive at the desk individually and can be routed to a trader algorithm.
  • Program – program orders are lists of orders in liquid markets that will be executed via a broker’s program trading desk and are relatively easy to execute.
  • Cash - these trades require in-depth market knowledge and personal attention. They are difficult to execute, because of their size, lack of liquidity or because there is market-moving news. They may be executed manually via a broker-dealer acting as an agent or directly with a counterparty to prevent market impact.”

“Quant equity trades are executed primarily through Algo and Program trades. These trades represent around 90% of the total quant equity trades and around 65% of the total value. For developed markets, Algo and Program represent around 80% of the total value while this figure lies around 50% for emerging markets. The commission costs for quant transactions are execution only as we do not pay for broker research because the quant models are used to select stocks. Negotiating well with our brokers and using the right execution techniques benefit our clients.”
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