Driving down investor costs: Can buy-side firms learn from the data-fuelled world of F1?

The fast-paced worlds of Formula One and institutional investment have a fair bit in common. In both industries, optimal performance fuels success; therefore the ability to form a winning strategy and overtake opponents is crucial. Making profits for shareholders is important for F1 teams, while buy-side firms are under considerable pressure to generate high returns for their end investors. In the current low interest rate environment, saving even a fraction of a basis point can make a difference, so institutions are motivated to use whatever data sources are available to gain an edge over the competition.

Motor racing teams also rely heavily on data to get their drivers to the top spot. But when it comes to making the most out of the deluge of data at their disposal, investment firms still have a way to go compared to their F1 counterparts. The latter are extremely adept at leveraging data to produce the best possible results both inside and outside the racing track. They have evolved into data-driven operations, constantly enhancing their capabilities through technological investment and third-party partnerships. Rumoured acquisition talks between Apple and the McLaren Technology Group are a perfect example of how attractive advanced data mining capabilities can be, even to technology giants.

Across the financial industry, equity market practitioners have had access to tools, such as Transaction Cost Analysis (TCA), that allow them to enhance operational efficiency and reduce costs for some time. TCA is a performance measurement tool that enables institutions to evaluate the quality of their execution. Specifically, it monitors the cost effectiveness of trading activities, while also feeding back to compliance and reporting functions within the firms to help prove best execution to their clients. But with market participants always on the lookout for a competitive advantage to satisfy client expectations, and with regulatory reform promoting transparency and next generation best execution more than before, many now have the opportunity to replicate this approach in adjacent asset classes, particularly fixed income.

However, it is not as simple as exporting the methodology established in equities into the fixed income space. The markets are inherently different. Far more instruments are traded less frequently via different protocols, trade sizes are larger, and there are broader ranges of liquidity for each instrument. Trusted measures are needed, as a lack of transparency into pricing makes volume weighted average price (VWAP) type benchmarks redundant. The fixed income circuit has far more corners to navigate with less information to determine the racing line.

The good news is that the rise of e-trading in fixed income has provided a solid grounding for the development of TCA solutions in advance of Mifid II. It is estimated that approximately 50-55% of European government and 35-40% of European cash credit bonds are currently traded electronically in the institutional dealer-to-client space. Certain electronic venues can prime institutions for to take the lead by providing them with crucial access to sufficient depth, accuracy and cleanliness of trading data, including price and volume. This can be supplemented with a full set of historical trades and ‘perfect’ time-attributed reference prices.

Take a scenario where a buy-side firm is looking to assess its strength in fixed income trading with the help of its electronic platform of choice. Our platform, for example, enables buy-side firms to perform detailed TCA for every single one of their trades by measuring each electronic execution against the mid-levels of its proprietary composite. Furthermore, it offers clients the ability to analyse their behaviour through every stage of the trading lifecycle, and identify where improvements can be made. This allows them to modify their trading strategy to reduce costs and achieve optimal results for the end investors.

Yet, the benefits extend beyond the desk. Implemented well, TCA helps buy-side firms to deliver a more transparent and comprehensive reporting service to their clients. It also gives compliance officers more data to review, audit and adapt best execution policies, while allowing sales teams to quantify the performance of their funds. With just a handful of races to go until a new Formula One world champion is crowned, it is safe to assume that the team that selects, refines, and deploys the use of data most effectively will be in pole position. Similarly, those investment firms that get a better grasp of the intricate detail on the costs associated with their trade execution, will be on the front of the grid. After all, the specifics of the fixed income market mean that access to a meaningful benchmark and knowledge of the market structure are two key components for any TCA champion.


Charlie Campbell-Johnston is director, head of Business Operations, International at Tradeweb


Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 17 years he has been based in London writing about funds and investments. From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope. Jonathan was awarded Editor of the Year at the Professional Publishers Association (PPA) Independent Publisher Awards 2017. Shortlisted for the same in 2016, he was also shortlisted in 2017 and 2015 for the broader PPA Awards category Editor of the Year (Business Media).

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