Transaction Cost Analysis A-Z

Transaction Cost Analysis A-Z — November 2008

VI. A New Framework: the EBEX Indicators

In addition to absolute EBEX, we may look at the distribution of directional EBEX in figure 29 to analyse the brokers’ market timing. For example, broker 1 exhibits a negative median directional EBEX meaning that he tends to be too aggressive. So, this broker could have reached a higher trading performance if he were more patient when executing orders.

we divided this difference by the daily VWAP and multiplied the result by 10 4 to express the score in basis points. According to the benchmark comparison approach, a positive (negative) value indicates an execution that is less (more) favourable than the daily VWAP. Figure 30 is very interesting since it reveals quite dramatically the inconsistency of VWAP scores.

Figure 29: Distribution of directional EBEX by broker

Figure 30: Absolute EBEX vs. VWAP score

12 15

Statistics Mean

-.197

0 3 6 9

Median -.308 Std Deviation 0.444

1

Percent

Statistics Mean

12 15

-.023

Median -.021 Std Deviation 0.484

0 3 6 9

2

Percent

Broker

42 - Almost all data vendors as well as some trading venues compute and report in real time the daily VWAP. 43 - It indicates whether the trader received a higher or lower price than did the “average trader” of the day. 44- This stock was selected because it presents the largest number of trades to examine over the sample period (309 trades exactly).

Statistics Mean

12 15

0.058

Median 0.004 Std Deviation 0.421

0 3 6 9

3

Percent

-1 -0.7 -0.4 -0.1 0.2 0,5 0,8

Directional EBEX

Ignoring extreme performances (bad or excellent), VWAP scores are globally centred on zero and take either positive or negative values whatever the corresponding absolute EBEX. For example, the absolute EBEX is close to 0.7 when only about 30% of all market activity was traded at better prices than the execution price of the trade. In such a case, the interpretation is clearly an above-average quality of execution. In figure 30, for this level of EBEX, we observe VWAP scores varying from -50bp to +40bp. When focusing on extreme performances, we identify the same phenomenon. For very bad performances, the absolute EBEX equals zero, while VWAP scores vary from about +95bp to -20bp. For excellent performances, the absolute EBEX reaches 1 while VWAP scores exhibit values ranging from about -90bp to +20bp. Depending on the prevailing market conditions as well as

(c) EBEX vs. VWAP The common practice in the industry has so far been to use the daily VWAP to assess the trading performance, mainly because of its availability 42 and easy interpretation. 43 However, the absolute EBEX indicator is superior to any VWAP score since it provides a meaningful metric that is consistent over time and across securities. We can illustrate this valuable advantage with some examples extracted from our empirical analysis for a given stock. 44 In figure 30, we plot both the absolute EBEX and the VWAP scores that we computed for all the trades executed on the selected stock. The VWAP score was first obtained by finding the signed difference between the execution price and the daily VWAP. Then

83 An EDHEC Risk and Asset Management Research Centre Publication