Transaction Cost Analysis A-Z

Transaction Cost Analysis A-Z — November 2008

VI. A New Framework: the EBEX Indicators

both range from 0 to 1, given the way they are built. Figure 16 contributes to an understanding of the interpretation.

had more opportunities to trade at a better price after the order was executed.

A direct comparison of both indicators yields our directional EBEX indicator, interpretation of which is even easier. The goal of this indicator is to give information about how the intermediary could have traded over time to provide better execution. Given its construction, the simple difference between NBBEX and NABEX, the directional EBEX indicator can range from -1 to +1. Figure 17 (below) summarises the interpretation of the directional EBEX indicator.

Figure 16: Interpretation of the Directional EBEX components

Broker should be more aggressive!

1

Poor

To be improved

NBBEX i

Broker should be more patient!

To be improved

Best

0

1

NABEX i

NBBEX is close to zero when few traders execute at more favourable prices before order execution. In this case, the quality of execution may be said to be high. The intermediary did a good job because few traders obtained better prices. By contrast, NBBEX is close to one when many traders got more favourable prices before the order execution time. Hence, the quality of execution is low and the intermediary should have been more aggressive. Indeed, the intermediary would have had more opportunities to trade at better prices before the order was executed. The way we can interpret NABEX is similar, except that we focus on what happens after order execution. NABEX is close to zero when few traders obtained more favourable prices after the execution of the order. The quality of execution is then high because few traders execute at better prices than the intermediary did. NABEX is close to one when many traders obtained better prices, indicating a poor trading performance. In this case, the intermediary did a bad job in the sense that more patience should have been shown. The intermediary would have

Figure 17: Interpretation of the Directional EBEX indicator

The directional EBEX indicator exhibits a negative value when NBBEX is lower than NABEX. In this situation, we can say that the intermediary should have been more patient because more opportunities would have arisen to enable trading at a better price after the order execution. By contrast, the directional EBEX indicator is positive when NBBEX is larger than NABEX. In this case, the intermediary should have been more aggressive because more opportunities would have arisen to trade at a better price before the order execution. The specific situation in which NBBEX is equal to NABEX corresponds to a directional EBEX of zero. This means that there were

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An EDHEC Risk and Asset Management Research Centre Publication