The term 'TCA' has now become so common across the industry, and some would argue commoditized, that its value is in danger of becoming misunderstood. While most buyside firms use some form of broker post-trade analysis to measure how they've performed against their benchmark, the firms who are out-performing versus their peers are using a broader approach of pre-trade, real time and post-trade analytics to answer questions about how and why trading costs are incurred, and what actions can be taken to reduce them.
We call this broad range of tools Trading Analytics, and this article looks at some common Asia liquidity events to show practical examples of how Trading Analytics can provide data that answers real questions, helping traders take advantage of liquidity while minimizing costs.
TRADING AROUND THE OPEN AND CLOSE
More buyside traders are now involved in investment meetings, acting as advisors in the discussion of how to get the most alpha for a given investment decision. Using Trading Analytics to form an opinion in advance of the trade on how to structure its timing can have a significant effect on the alpha outcome. Understanding intra-day volume profiles and the corresponding volatility can be critical to finding liquidity that comes from trading at the times when others also are. The chart below shows average profiles of how much is traded in different Asia Pacific markets in the first and last 30 mins of the day (including auctions).
One common theme is that traders often avoid the more volatile early trading period for fear of price movements, preferring to hold their trading back to the more stable sessions through the day. However, doing this too much, particularly in markets such as Taiwan and Japan where high volumes are done during early trading, can push overall costs higher and increase risk. Missing out on significant early liquidity requires the trader to execute more later in the day where they may need to cross the spread more, and increases the risk of non-completion of an order – often overnight volatility is higher than that seen during early trading sessions. It also increases risk of over-participation in the Close which may push a stock price, a topic that Asian regulators are particularly sensitive to.
While an overall understanding of market profiles is helpful, Trading Analytics really becomes useful at a stock-specific level, understanding in advance when a stock may deviate from the market norm. A recent query run by a trader using ITG's pre-trade portal for stock-specific volume analysis shows that Hong Kong stock Cheung Kong  normally trades significantly more during the last 15 mins of the day than the market average. When the trader received an order from the portfolio manager (PM) late in the day, he made the decision to hold more of the stock back for the closing session to take advantage of this, while finishing more of Hang Lung  when he could, and completed the trades favorably.
RED FLAGS AND UNEXPECTED LIQUIDITY EVENTS
ITG's Transaction Cost Analysis of real institutional trading costs consistently shows that many outlier trades – both high and low cost - occur at times when both volume and volatility in a stock are high. To handle this, traders need a real-time 'red flag' system to accurately identify these conditions at a stock level, and make decisions accordingly. This allows early conversations with PMs to adjust strategy or manage expectations, as well as enabling the trader to change the trading instructions to take advantage of the situation and increase the chances of a positive outcome. We call this 'market surprise' monitoring, which when combined with real-time P&L analysis is a further example of how Trading Analytics can help traders maximize liquidity opportunities or make informed risk management decisions to improve their daily trading.
MAKING THE MOST OF THE HOLIDAYS
Another common liquidity event features the many and varied holidays across the region. Knowing which result in liquidity lulls, and which in volume spikes, is useful both for staffing trading desks and planning investment decisions around them. For example, Trading Analytics drilling into Opening volumes after Hong Kong holidays shows significant and unusual levels of liquidity after the locally specific holidays of Chinese New Year, National Day etc driven by large backlogs of orders from overseas. The same is not true for local holidays in the more domestically driven Japanese market, nor for the period of global holidays over Christmas and Easter. Detailed data can help both traders and PMs decide whether to stay away from these volatile spikes or take advantage of unusual liquidity.
TAKING ADVANTAGE OF LIQUIDITY EVENTS
These are just a few examples of how Trading Analytics moves far beyond standard TCA to provide traders and PMs with data to improve trading decisions and maximize alpha. Trading Analytics also encompasses data-driven tools to help answer a range of questions covering portfolio capacity analysis, regression testing on turnover, how best to time orders and how to treat different market cap stocks in various markets. In Asia Pacific's often illiquid and volatile market conditions, this can make a significant and long term difference to both the traders, and to fund performance.
ASK US A QUESTION:
ITG's Trading Analytics team invites you to ask us a question about the Asia markets that could help improve your trading. Using the ITG Peer Database and a wide range of market data and analytics tools, we provide evidence and data-driven insights that can be acted upon to improve trading outcomes.
Email: firstname.lastname@example.org with your questions