LIFE CYCLE OF A TRADE Monique S. Botkin , Investment Adviser - PowerPoint PPT Presentation

LIFE CYCLE OF A TRADE •Monique S. Botkin , Investment Adviser Association, Moderator •Christopher Marzullo, Brandywine Global Investment Management •Alpa Patel, U.S. Securities and Exchange Commission •Steven W. Stone, Morgan, Lewis & Bockius, LLP

Life Cycle of a Trade Post- Post- Pre-trade Trade Life Trade trade processes Cycle errors processes

Types of Traded Investments Derivatives Fixed (swaps, Equities Currencies Income futures, options) www.investmentadviser.org 3

Pre-Trade Processes Broker Selection Broker Selection Soft dollar Soft dollar arrangements arrangements • Due diligence • Broker vote • Reasonability • Affiliated brokers determinations (agency, agency cross • Agreements with and principal trades) brokers and providers

Trade Life Cycle Building the Placing the Monitoring Allocation Settlement order order execution to client with client • Selection of quality accounts custodians brokers or venues

Building the Order Order netting Excluding for same ineligible accounts (IPOs, accounts accounts securities with securities with eligibility restrictions) Order aggregation across accounts Order www.investmentadviser.org 6

Trade Life Cycle Building the order Building the order Placing the order Placing the order Monitoring Monitoring Allocation to Allocation to Settlement with Settlement with execution quality client accounts client custodians •Selection of brokers or venues (e.g., ATSs) •Explicit and implicit •Partial fills •Reconciliations •Sequencing costs (opportunity •Fails shortfall) •Transaction cost analysis

Post-trade Processes Trading surveillance Monitoring best • Insider trading execution • Manipulation & window dressing dressing • Monitoring broker • Cross trades & use of affiliated performance brokers (and capacity) Monitoring soft dollar arrangements • Commission levels • Mixed use allocations

Trade Errors Whose error and Breach of duty of What happened? cause? care? Did the error involve Did the error involve a How handle (bust, investment decision- breach of client move position, making or imposed or legal reverse in market, implementation? restriction? have broker cover)? How calculate any loss (de minimis, How reimburse a Inform client? opportunity costs, client for a loss? windfalls, netting, highest measure)? 9

Heat Map of Trader’s Concerns Hot Hotter Hottest • Too much SEC focus on equity • Finding meaningful, account • Affording technology needed to trades, need more scrutiny fixed specific TCA "apples to apples" compete income trading • Information leakage via execution • Sourcing natural liquidity • HFT being considered as non- venues • Insider trading impactful to markets impactful to markets • Short swing profits • Short swing profits • Hidden liquidity aggregation • Hidden liquidity aggregation • Filing miscues • Best execution • Monitoring our brokers execution • Effects of gaming • Drastic increase in non-trading logistics • Challenging process to upgrade/ responsibilities • Fragmented markets change best of breed OMS/EMSs • HFT • Need for more flexible Multi- • Efficient Use of Pre-, Post-, and • CSAs/ways to reduce executing benchmark TCA Real-Time TCA brokers • Managing/Understanding • Finding liquidity • Integrating New Trading Routing/ Order-Handling • Counter party risk Tools/Strategies on the Desk Procedures • Algorithm/high-touch variation of • Identifying which systems to add/ trades keep on desk • Measuring performance • Budget/Paying soft dollars and research • What is the right TCA measure for the group • Resource consumption by our PMs and Analysts Source: TraderForum, Top issues facing buyside traders (February 12, 2010) 10

SEC Enforcement Actions • Best Execution • Market Manipulation • Principal Trading • Principal Trading • Soft Dollar Payments • Trade Allocation • Cross Trading www.investmentadviser.org 11