Transaction Cost Analysis A-Z

Transaction Cost Analysis A-Z — November 2008

VI. A New Framework: the EBEX Indicators

2. Detailed Presentation of the Indicators Our two fundamental indicators rely on the same method and are easy to compute and interpret. We describe in depth how they are built and highlight their multiple advantages over the benchmark comparison approach. Next, we present another related indicator whose purpose is to associate the intermediary performance score with a cost for the end investor. We finish by describing how our indicators can be adjusted to account for specific trading instructions and constraints. (1) Absolute EBEX The absolute indicator of E DHEC B est Ex ecution for an order is the difference between one and a ratio between the aggregate volumes traded at prices better than the average trade price obtained for the order divided by the order size and the aggregate volumes without consideration of price divided by the size of the order. As illustrated in figure 13, the measurement window for the ratio corresponds to the period over which the intermediary has discretion to execute the trade, that is, from the time the broker receives the order (release time) to the next market close. 35

The absolute EBEX indicator for order i is calculated (first for a buy, then for a sale) as follows:

35 - In the event of specific instructions from the investor, the measurement window ends at the specified time the intermediary must stop trading. 36- S i can be simplified but is shown for clarity.

In both equations, each element is defined as follows: • EBEX abs,i is the absolute best execution indicator for order i during the day • day is the interval between the time the broker receives order i and the next market close • S i is the size of order i 36 • AP i is the average trade price obtained for order i • N is the number of trades at a price better than AP i during the time interval • is the size of trade n at a price higher (lower) than AP i during the interval day • M is the total number of trades during the time interval day ; M ≥ N • is the size of trade m during the time interval day Given the way it is built, the absolute EBEX indicator can only take values between zero and one. Interpretation is thus greatly facilitated, as shown in figure 14 below.

Figure 13: Time window for the Absolute EBEX

Trade decision

Order release

Order execution

Market close

Absolute EBEX

70 An EDHEC Risk and Asset Management Research Centre Publication