Order Handling of Institutional Investors

Abstract

This study reflects the assessment of the largest European buyside companies concerning new order execution opportunities like Direct Market Access, Smart Order Routing or Algorithmic Trading. The focus of the survey is on self-directed trading based on these new technology driven execution opportunities (here defined as non-delegated order handling). This differs from the traditional way of order handling where execution responsibility is delegated to brokers. Altogether, the respondents largely support the concept of non-delegated order handling: They assess it to be compatible with their requirements concerning order sizes, anonymity as well as urgency. Also they perceive it to be flexible for variations in these demands. Finally, they believe this concept increases their trading control. As the main driver, the innovations’ fit for institutional trading tasks–determined mainly by the ability to provide trading control, anonymity and to satisfy varying urgency demands–was identified. Beside the fact that this fit directly affects the actual usage of non-delegated order handling, it also significantly affects performance expectations that prove to be the second strongest driver of the concept’s adoption. Further, it turns out that competition exhibits a rather weak effect. As an inhibitor for non-delegated order handling, contractual barriers could be identified. Contractual barriers are the financial attractiveness of broker contracts as well as valuable services concerning provided infrastructure and research that might be missed when deciding to use non-delegated order handling.

TOPICS: Simulations, statistical methods, VAR and use of alternative risk measures of trading risk