Transaction Cost Analysis A-Z

Transaction Cost Analysis A-Z — November 2008

VI. A New Framework: the EBEX Indicators

suggest that, on average, broker A performs better than broker B (0.65>0.55) but that he is also less consistent (0.45>0.33). As a result of what we have just seen above, the absolute EBEX indicator may be readily used to set a clear performance objective for any intermediary. Accordingly, an active trader will be expected to attempt to provide an average EBEX as high as possible with the lowest standard deviation. For example, any investor could request his intermediary to reach a defined average absolute EBEX to justify the use of an active market timing strategy. This performance objective would be very relevant because the absolute EBEX indicator cannot be gamed, as it involves post-trade peer group analysis. Given these advantages, the absolute EBEX method offers tools that comply with MiFID requirements. Indeed, under MiFID, traders must demonstrate that they have executed at the best possible price for their customers while taking into consideration potential multiple liquidity pools. For this purpose, it is necessary to compare each trade with the universe of all the trades referring to the same security and executed on all available trading venues. As our approach involves peer group analysis and theoretically includes as many trading venues as required, it is a suitable and relevant tool that should play an important role in the post-MiFID environment. (2) Directional EBEX Directional E DHEC B est Ex ecution for an order indicates how the broker 37 could have traded over time to provide better execution. This indicator results from the combination of two sub-indicators that measure the volumes traded at better prices both before

and after that the trade was executed. The directional EBEX indicator for order i is computed as follows:

= NBBEX

− NABEX

EBEX dir ,i

i , j

i ,t

NBBEX i,j are thus the components of the directional EBEX indicator. Their definition and computation are very similar; only the measurement window of reference differs, as shown in figure 15. and NABEX i,t

Figure 15: Time window for the Directional EBEX

Trade decision

Order release

Order execution

Market close

NBBEX

NABEX

37 - Or any other intermediary.

Directional EBEX = NBBEX - NABEX

NBBEXi,j NBBEX i,j

stands for N umber of B efore- B etter Ex ecutions for order i over the time interval j . This component can be defined as a ratio between the aggregate volumes traded at a price better than the average trade price of order i divided by the size of order i and the aggregate volumes without consideration of price divided by the size of order i . This ratio is computed over the interval j , which goes from the time the broker receives order i (release time) to the time order i is completely filled (execution time). The mathematical notations referring to NBBEX i,j are given below (first for sell orders, then for buy orders):

N ∑

P > AP i

V n,j

n = 1

(S i

) V m,j

NBBEX

=

i,j

M ∑ (S i

m = 1

)

72

An EDHEC Risk and Asset Management Research Centre Publication