Hello mst2000,
A few comments, and my reply.
VWAP is apparently beginning to emerge as somewhat of a benchmark for best execution among institutional traders.
This is not true on two accounts. First, VWAP calculations have been done for years, I'd venture to say over a decade. It has become popularized over the past 5 years by transaction cost consulting firms like E.M. and others.
Second - and as an attorney, you'll appreciate this - "best execution" currently has no concrete, quantitative definition; this is to say that the best price available at the current moment is not necessarily best execution in every case. This lack of a concrete definition, with firms simultaneously being warned by regulators of their obligation to provide whatever "it" is - evokes the words of the Supreme Court justice who said of obscenity, "I know it when I see it."
So: VWAP is not new, and does not - cannot - represent "best execution," since such is not quantifiable, at any rate.
[T]he article...stated that sell-side traders like the system quite a bit, but that buy-side traders are less enamored, in that they think they can "beat the VWAP", so, by personality, they are less inclined to use a system that tags them as "average." and [W]hy would sell side traders favor a system like eVWAP and buy side traders eschew it[?]
First, recognize that buyside traders are little more than an extention of the portfolio manager, and act more in an order routing and timing role than in an execution role. The sellside traders are those who trade, inject capital if necessary, and overall execute the orders, trying to implement the PM's and buyside desk's trades within the specified parameters.
Buysiders want sellside traders to work their orders diligently; as with any customer/service provider relationship, each XYZ Fund wants ABC Capital Markets to treat its' orders better than any of its' other customers, regardless of how many orders they might send, how large those orders are, or how long they've had a business relationship.
There have been many approaches to trying to hit the VWAP over the years. The basic strategy, still utilized today, is to feed orders into the market at regular intervals, thereby approximating the chart. Others have calculated the VWAP on a real-time, order-by-order, share-by-share basis, flashing or signaling when the market was over or under the VWAP to signal when the trader should start (and stop) executing. The point is, trading with VWAP as the benchmark is a time and labor intensive process.
Sellsiders - busy, handling hundreds of orders of varying sizes in rapidly changing market conditions - would be happy to plug an order into an ATS and have it spit out a chunk - or the whole thing - done.
Buyside traders and PMs don't want to be treated that way. They want the trader to be hands-on, to not only meet, mechanically & passively, but to actively work to beat the day's VWAP. They want the sellsider handling their order to work it, rather than merely sitting it in a server that will fire off the minimal acceptable price at the end of a specified period.
It is for this reason that a few very large institutional desks have special rates for VWAP tagged orders. If the desk meets the VWAP within, say, 10 basis points, it's a flat commission. If the desk beats the VWAP by more than 10 b.p., there's a performance bonus. And if the desk doesn't beat the VWAP by more than 10 b.p., the trade is either commissionless or, under another iteration of that plan, when VWAP isn't beaten the trading firm pays out to the buyside institution to make up for the difference.
As you might imagine, institutions love desks with the above types of fill policies and consequently send them a lot of blocks. There are only a few firms that I can think of, offhand, that offer such deals, because it can get quite expensive if either the market gets exceptionally volatile or your traders make some mistakes.
I should think that any system that manages to fill a sizable percentage of the total order at a price that represents price improvement 83% of the time would be attractive to both buy-side and sell-side traders.
Sellsiders will say, "Absolutely." Buysiders will say, "If that's how you're going to treat my business, I'll give DEF Securities, the hungry little firm down the street begging for my business a chance to prove themselves," - and DEF will, hoping to garner more business as a result of their handling of complicated, risky, or labor-intensive orders.
I've stated before that I think that eVWAP is an interesting system, because VWAP is important. When your success is measured in basis points, you need some method of cost control and benchmarking. But two things need to be stated, and these are my personal, LPS5 feelings, as per my experience.
1) To the extent that buy or sell interest is withheld from the continuous market, price discovery is skewed.
I'm a very strong proponent of limiting the amount - whether in shares as per the float, or percentage of average volume over some time period...whatever - of shares that can be crossed in off-market systems. By removing these orders from the continuous market, the price discovery process is tilted inordinately toward the retail end of the spectrum.
Left unfettered, and before you know it, all institutional trades are getting printed at a price which is determined by 100 to 650 share market orders throughout the day!
(Note that this has nothing to do with transparency.)
2) VWAP itself is overrated.
I say this for a reason similar to that which makes buysiders averse to the mechanization of their large, price sensitive orders. What was originally a measure of performance evaluation is now a matter of performance evasion.
Sticking near or at the pricing benchmark - whether VWAP, the new "RPM" system, or whatever - is "good enough," putting the guideline - rather than the buysider's investment objectives, the trader's market savvy, or other desk attributes - in the driver's seat, so to speak.
And the tail, therefore, often winds up wagging the oft-cited dog.
LPS5 |
