Research by ITG suggests that paying more in commissions can lead to worse execution performance and create far higher overall costs, particularly on smaller orders.
This suggests fund managers need to more carefully measure the total costs of trading and monitor commission costs and performance costs in an unbundled way to protect fund value for investors.
With the advent of electronic trading in Asia Pacific, buyside firms now have a choice between high touch (sales trading desks) and low touch (electronic algorithm/ DMA) trading strategies which usually come with correspondingly higher or lower commission rates from brokers.
ITG has analysed over USD1.3trn of Asia Pacific buyside trading data over an 18 month period to investigate the relationship between trading performance and commissions paid.
Results show that, in general, orders where higher commissions are paid often incur poorer trading performance – buyside firms pay more at two levels – not only on the higher visible cost of commission, but also on the “hidden” performance cost of paying more to get their trade done.
This is particularly prevalent for small orders where paying a higher commission rate generally resulted in poorer execution performance and created far higher total cost – for orders less than one per cent of average daily volume, the average cost was more than twice as expensive in total.
Looking at an average, for a firm trading USD1bn this equates to paying USD4.6m more in costs if selecting high touch- high commission trading options.
ITG says buyside firms must understand how much they are paying for trading – they should measure both the commission rate paid, and the performance cost to get their trades done.
The data shows that a buyside trader can save money for the fund and reduce execution costs by using electronic low touch- low commission trading strategies for small orders.
