Transaction Cost Analysis A-Z

Transaction Cost Analysis A-Z — November 2008

VI. A New Framework: the EBEX Indicators

start working it. Similarly, we assume that the time the response is sent by the broker is the execution time of the order. 2. No consideration for split executions: we assume that the order is fully executed at the time the broker answers, without considering the execution time of multiple trades, if any, to entirely fill the order. We assume that the time-stamp response corresponds to the time the broker stopped timing the market and working the order. 3. No specific instruction set by the investor: we assume that the broker has full discretion over the timing of the trade to complete. As a result, we always compute our indicators using as a last point of reference the market close of the day of execution. 4. The Euronext order book is the market of reference: as explained above, we use only Euronext public intraday trade data to compute our indicators. Our peer group analysis does not take into consideration the entire universe of trades since we lacked information about trades executed off the Euronext central order book (block trades executed on the upstairs market and OTC trades). (2) Analysis of the order sample The sample contains orders that exhibit various characteristics in terms of direction, size, release time and execution time. Figure 19 shows the distribution of buy and sell orders over the three-month period. January, with about 39% of orders, is the busiest month. By contrast, only about 27% of orders are released in March. 51.47% of sample orders are for sells, 48.54% for buys—a good balance. Although it does not appear here, we can add that a great majority of the orders are executed the

A brief description of the order sample is also included.

(1) Data and assumptions Our sample consists of 4,542 Euronext stock orders over the three-month period from January to March 2005. These orders were fully executed, so each order may be viewed as one trade. We should point out that we have no information regarding the potential constraints attached to these orders. This information was unavailable when we collected these order data. The order database contains the following information for each order/trade: •  ISIN code for identifying the stock •  trade direction—buy or sell •  traded volume and its average execution price •  time-stamp for the time the order is sent to the broker—release time •  time-stamp for the time of broker response with execution details—response time •  identification code for the broker who completed the trade—broker ID To apply our method to this order sample, we used the Euronext public trade data over the same period. This data set contains the following information for each trade executed in the central order book: •  Euronext internal code for the stock •  time-stamp for the time the trade is executed—execution time •  price and the number of shares traded Given the data at hand, we had to formulate four assumptions to compute our indicators. 1. No transmission delay: we assume that the time the order is sent to the broker is the time the broker receives the order and can

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An EDHEC Risk and Asset Management Research Centre Publication