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November 2022
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AAM Magazine
November 2022

Harnessing the Power of Trade Data Analytics

By Northern Trust   
  • Asia
  • Global

For asset managers across the globe, there is a growing focus on data analytics that can help support decision making.

Outsourced trading has turned mainstream over the past few years as asset managers have sought ways to reduce costs, gain scale and increase efficiencies. And while costs and efficiency are top of mind for today’s asset managers, another important potential benefit to outsourcing is access to advanced data analytics that can help strengthen trading performance and improve transparency and oversight.  

For asset managers across the globe, there is a growing focus on data analytics that can help support decision making. A recent Northern Trust survey of 300 global investment managers revealed that 52% of respondents plan to invest in analytics to help increase distribution, while 49% plan to leverage data tools to improve decision support and analytics infrastructure.1

Data paints a picture, and outsourced trading providers can often offer advanced analytics that asset managers may not otherwise be able to access themselves. From pre-trade data science capabilities like behavioural analytics to post-trade transaction cost analysis (TCA), data analysis is changing the trading game and asset managers should keep up in order to continue to deliver alpha for their clients. 

Understanding the benefits of outsourced trading for data analysis

Outsourcing trading is often seen as a way for asset managers to gain access to technology and expertise by partnering with firms that offer scale and specialisation. Managers that have resource constraints may choose to outsource certain functions to a third-party provider who already has the technology built into their solutions and the ability to invest in technological innovation. Outsourcing can level the playing field for small- or medium-sized firms by reducing the amount of investment required to move away from an outdated technology model.

Outsourcers offer other benefits for data analysis as well. For example, the outsourced provider holds a huge amount of trade data and can examine it in ways other providers cannot, including the managers themselves. Plus, the information and insights provided by the data analysis offer an opportunity for a feedback loop between the provider and asset manager. For the provider, the goal of data analysis such as TCA is a constant evolution and re-evaluation of execution strategies and venues to ensure lower costs for clients and adaptation to changing market dynamics. For the manager, improved data analysis can help meet compliance requirements, such as those related to MiFID II. Finally, outsourced traders can provide feedback on price performance before, during and after a trade is completed to constantly evaluate trading.

Taking a closer look at transaction cost analysis

Over the past few years, TCA has evolved from a standard exercise to a meaningful assessment of trading performance. Some of its key benefits include: 

  • Improving transparency: By comparing a trade against various benchmarks to better understand the strength of the execution. This can be used to comply with MiFID II regulations related to best execution by demonstrating that trade execution is aligned with an asset manager’s best execution strategy.
  • Measuring performance: Each executed trade in a portfolio is analysed based on a series of performance benchmarks. Optimised trade execution can save an asset manager a substantial amount of effort and expense and can help the performance of the portfolio.
  • Improving trade execution quality: TCA brings science to the art of trading, with tangible benefits. It plays an important role in execution strategy across different trading environments and asset classes.
  • Offering actionable insights: TCA allows a trading desk to learn from past activity in order to improve future trades by studying/profiling past trades and the execution methodologies.

Taking analytics to the next level and beyond

Innovations in data technology are constant, with new capabilities being developed and released regularly. It can be onerous for an asset manager to keep up with the latest advancements, but an outsourced provider should be monitoring and exploring the evolving nature of data available across capital markets and the accompanying technology. When choosing to outsource the trading desk, a manager should seek a provider that offers key technology and data analysis advantages:

  • Use of enhanced datasets and data visualisation tools: Innovating with data science, enhanced datasets and data visualisation tools to enhance existing capabilities.
  • Data automation: Exploring new, inventive ways to organise data, especially through artificial intelligence (AI) which can improve scale and efficiency and can enhance the quality of data, making it easier to understand.
  • Specialised expertise and work with industry leaders: Gaining knowledge and insights from ongoing relationships with experts in capital markets data.
  • Service orientation: Sophisticated data support (i.e., a feedback loop) can help achieve insights that drive meaningful solutions via customer service.

Making the right choice

Data analysis has evolved into an important component of trading and asset managers should be making the most of the insights offered by data to stay competitive. When considering outsourced trading, it is vital to make sure the provider offers cutting-edge data analysis techniques in order to enhance trade performance and efficiency. By leveraging the power of analytics, an asset manager can assess the performance of its trading activity to determine which strategies are working and which are not.  

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