Tag Archives: best execution

Tech Talk

Algorithms & Altruism 101: Big Buy-Side Player Want Better, Going Back Upstairs

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wsjlogoTake-away from (2) news articles today profiling proliferation of algorithmic trading strategies: The buyside “gets it”, but they don’t want it..

 Excerpt from WSJ’s Bradley Hope article “Buyside Traders Move Upstairs”: Some of the world’s biggest investors are changing the way they trade in U.S. markets in response to what they say are rising risks for institutions of their size.

The strategies include conducting more “upstairs trades,” in which deals are executed among big institutions, bypassing the broader market, as well as other sophisticated order-routing techniques designed to avoid pitfalls that have become increasingly apparent to investment managers.

Investors say such measures are increasingly necessary because the proliferation of algorithmic trading and other structural issues, including the fragmentation of the market, are hurting their ability to get the best prices and execute large trades quickly.

marketsmedia logo Excerpt from MarketsMedia “Buyside Traders Seek More..”

With algorithmic trading firmly entrenched in the electronic equity landscape, buy-side traders on an eternal quest for alpha preservation are moving beyond algo selection to algo optimization, which entails monitoring and calibrating as the trade is going down.

“The real objective is to get best execution, which often requires not only picking an algorithm but managing the parameters of that algorithm subject to market conditions,” said Michael Earlywine, head trader, North America at $1.2 billion asset manager Ecofin.

One of the more compelling critiques re: above noted topic is courtesy of industry veteran and electronic trading guru Thomas Quigley, Managing Director/Electronic Trading Group for agency boutique WallachBeth Capital,  “The take-away from both articles is a message that we caveat whenever institutional firms reach out to us for guidance; however commoditized electronic trading approaches have become, and however easy it may seem to choose and implement algo-based strategies, the need for consultative and agnostic guidance has never been more relevant.”

Both above-noted news articles can be accessed by clicking on the logo links adjacent to the excerpt.

ETF News, People Profiles, Strike Price

ETF and Options Execution Firm Expands Global Footprint: More Hiring In Store

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wall-street-letter-logo  Courtesy of Wall Street Letter reporter Sean Creamer

Institutional brokerage WallachBeth Capital LLC will expand its staff to bolster electronic trading across exchange-traded funds and options over the next two years, according to Michael Wallach, CEO.

The agency broker-dealer aims to bring on 15-20 people, some of whom may be college interns who transition to permanent employment with the company, according to Wallach.  He added “this strategy ensures the staff has a rounded experience in the firm before taking up a permanent role.”

WB CEO Michael Wallach (r), Pres/COO David Beth (l)
WB CEO Michael Wallach (r), Pres/COO David Beth (l)

Beyond staff expansion, the brokerage, whose headquarters is based in the heart of Wall Street and maintains a footprint in the UK, is aiming to expand its ETF execution presence to South America to serve pension fund managers in these regions, Wallach noted. “ Many money managers throughout the world now trade US ETFs. We want to introduce our model to any region whose managers want and need real best execution services.”   To view the full article from WSL, please click here.

ETF News

Pre-Thanksgiving Special: Custodians Flip The Bird to RIA Customers Seeking ETF Best Execution

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riabiz logo  Courtesy of RIABiz and reporter Lisa Shidler

MarketsMuse Editor Note: Kudos to Lisa “Lois Lane” Shidler for her insightful expose profiling how custodians to RIAs excel at squeezing lemons from customers who they must think are lemmings. Though Ms. Schilder neglected to spotlight the fact that custodians systematically sell their customer orders to select principal trading firms (e.g KCG) who cherry-pick orders they can exploit for trading profit, her insight i.e. the practice of imposing exorbitant trade-away fees on those very same customers who seek to secure the real best prices via independent execution only firms is a topic worthy of sharing this story with industry regulators. Too bad those latter folks don’t get it…perhaps because they’re beholden to the biggest custodians in the industry?

Here are a few excerpts:

The big four RIA custodians are now charging advisory firms giant new fees — in the tens of thousands in some cases — relating to some ETF purchases.

Schwab Advisor Services, TD Ameritrade Institutional, Pershing Advisor Solutions LLC and Fidelity Institutional Wealth Services are levying what are known as “trade-away” fees to RIA firms that buy exchange traded funds through a broker-dealer other than the one owned by the custodian. The advisor typically chooses to use these third parties because they believe that RIA custodians are executing trades poorly along the bid-ask curve and forcing them to make ETF purchases at unacceptably high prices.

At first blush the fees look fairly benign. The fee at Fidelity is a $20 fee per account per trade. TD Ameritrade charges $25 per account. Pershing’s fee ranges from $8 to $20 per account depending on the volume of the trade. Schwab declined to disclose its fee through its spokesman, Greg Gable.

These fees have put RIAs like Chris Romano, director of research and trading with Fusion Investments Group LLC in Pittsburgh invests, in a bind in certain instances.

Though his firm manages about $139 million in assets, the bulk of them are institutional and banks custody them. Fusion advises for other RIAs but those assets are held away. In short, his firm manages just $11 million of mostly ETFs with Fidelity’s RIA custody platform, which means Fidelity’s $20 fee is too costly for the size of trades that he does.

“We don’t even consider trading away [in effort to get best execution] at Fidelity because of the high ticket trade away fee,” Romano says. “On the smaller account sizes, it can be a really significant fee. If the fee is $20, that can really add up.” Continue reading →

Tech Talk

Algo Shop Takes On Big Brokers With Pragmatic Solution To Combat Conflicted Brokers. Bravo!

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tradersmag Courtesy of Mary Schroeder, TRADERSmagazine.com

MarketsMuse Editor Note: Although the following story profiles the algo revolution taking place within the FX market, those buysiders (and sell-side firms) utilizing algorithms for listed stocks, ETFs and options should find it easy to read in-between the lines–key word “conflict of interest.”

david_mechner1
David Mechner, Pragma

Big brokers began offering foreign exchange trading algorithms five years ago, and now all of the major players have an offering. Now a vendor is hoping to upend the status quo with a suite of algorithms it claims will offer a better execution.

“We are an independent provider of trading technology and there’s a greater awareness these days in the FX market about existing algo providers who are generally dealer banks with a principal interest,” said David Mechner, chief executive at Pragma, historically a vendor of equities algorithms. “Their P&L is in direct conflict with that of the client.”

Mechner argues that banks may favor their own liquidity pools when handling customer orders and that may work to the disadvantage of the customer. “It’s an obvious conflict of interest,” he added. “A lot of the algo offerings that the banks provide explicitly trade into their own stream. Some of them are mixed where they may or may not. Some will mainly trade on ECNs, but there’s a clear awareness that there’s a role that an independent firm can fill there.”

Foreign exchange algorithms, like their cousins in the equity market, break up a large block trade and feed it piecemeal into the market place over time. In the FX world, the algos are succeeding point-and-click aggregation technology that simply gives the buyside access to a big pool of liquidity that might include ECNs as well as dealers. They are point-and-click mechanisms much like the old direct market access platforms of the traditional equities world.  FOR THE ENTIRE STORY FROM TRADERSMAGAZINE, PLEASE CLICK HERE

People Profiles

Profiling Broker Excellence: A Rare Commodity

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nytLogoExcerpts courtesy of June 26 NYT column by Nathaniel Popper

MarketsMuse Editor’s Note:  Though we generally spotlight the most relevant leading news media articles profiling the trading of ETFs and Options, on a selective basis, our editorial team also makes mention of compelling profiles of investment managers, traders and institutional brokers. A good example is our recent sharing of this video clip.

Today’s  NYT front page includes an equally compelling profile of Royal Bank of Canada’s trading desk. The ‘take-away’s taken from that article “Putting the Brakes on Trading” include the following:

“..Critics of modern markets say that recent innovations in trading have ended up creating conflicts of interests between banks with extensive trading operations and the customers who send them trades to execute. In some cases, the banks have an incentive to trade in exchanges that reward them with rebates, or in their own dark pool, rather than where they can get the best price for their customers…” Royal Bank of Canada says that its trading programs ignore the fees and rebates.

“Our philosophy is, and we sit around here all the time saying it: Doing the right thing is not always the most profitable thing,” said Robert Grubert, the head of trading at R.B.C. “As business people that’s not great, but it’s an investment in our client and the long term.” Continue reading →

People Profiles

Buy-Side Traders Making Peace With Computers; Re-Embracing High-Touch.

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Solid  WSJ article courtesy of reporter Telis Demos (Jan 27 WSJ).. MarketsMuse has taken liberty and extracted most interesting observations..

wsjlogo“…. In recent years, a computer typically would have swiftly matched such an order with a buyer, sidestepping trading floors altogether…..But more recent soft trading volume has left many traders unable to move stock as quickly as they might like…”

A decade of promoting electronic stock dealing has reduced banks’ costs. Even so, financial firms are facing renewed profit pressure, as market volumes sink and new rules crimp financial firms’ capacity to deploy capital and take risks. ..”

One response has been to bring humans, long on the defensive in the stock-trading business amid cost-cutting and productivity-boosting efforts, back into the loop in a bid to move shares that otherwise might sit untouched.

As a result, banks are combining electronic and live trading businesses in a way they haven’t before….

Banks say clients still will have to opt into hybrid trading services that combine human eyes and electronic systems, and can continue to use separate functions if they prefer. Cheyenne Morgan, analyst at Tabb Group, a consulting firm, said banks are “working with clients to figure out what the right balance would be” between electronic and traditional trading…”

Commenting on the WSJ article, a senior trading specialist at WallachBeth Capital, a boutique execution firm specializing in ETFs, single stock block trading and options execution for institutions and hedge funds stated, “Its nice to know that the media has re-affirmed our firm’s business model, which has always been based on what we call the HT-Squared principle;  a combination of high-touch human intervention coupled with leveraging advanced trading system technology.”

That trader added, “The notion of relying exclusively on computers and algos has certainly proven popular during the past number of years. The obvious concern is whether relying on robots is appropriate for those obliged to secure real best execution, which means capturing market color not available on screens, and prices that will never be displayed on a screen, but are attained through discrete navigation.”

ETF News

Knight Capital and ETFs.. Setting the Stories Straight.

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indexuniverseexcerpt from Olly Ludwig’s Nov 30 column

You might think that having Knight Capital in play could be a threat to ETF trading. Luckily it’s not.

Still, it struck me that thinking through the possibilities surrounding an acquisition of Knight by Getco or Virtu is a worthwhile exercise.

After all, Knight is the biggest ETF market maker out there, and if Knight’s transition to new ownership is fraught with unexpected twists and turns, does that mean that many exchange-traded funds, especially the smaller, less liquid ones Knight shepherds, won’t get the love they need to trade cleanly?

Specifically, I found myself wondering if ETF trading would be adversely affected if Reggie Browne and his team at Knight don’t land on their feet but rather somewhere else on the Street.

If you’re wondering who Reggie Browne is, you need to read Ari Weinberg’s story in Forbes about Browne. Calling Browne “The Godfather of ETFs” did elicit derisive guffaws in some pockets of the ETF industry, but the piece makes an important point: Knight and Browne are big fish in ETF trading.

Knowing that makes the acquisition of Knight by Getco or perhaps Virtu entirely understandable. What upstart trading firm wouldn’t want that feather in its cap? It would be a strong signal that whoever ends up buying Knight has grown up and moved out of the sandbox and into the shark tank.

Incidentally, our thinking here at IndexUniverse on this potential acquisition of Knight is that this is pretty much a corporate story, that Browne and his team are likely to make a smooth transition to wherever they end up, and the world of ETF trading really won’t be affected whatsoever (MarketsMuse editor note: MAYBE)

Still, as I said, I thought it might be worthwhile to look at the story behind the story.

And the crux of that story is that the ETF trading operation—that is, Reggie and his team—is a huge piece of the motivation to do this deal.

MarketsMuse Editor Note–the full IndexUniverse article can be viewed here—but before clicking away..read  a superb comment on that article–and its worth re-broadcasting:

One critical observation that has NOT been made re: role of ‘Godfather Knight’ (or any proprietary trading firm) within the ETF landscape: Knight is a Market-Making firm–NOT a broker. Brokers work as fiduciary agents For customers, market makers (aka MMs) trade Against customers’ best interests. This is NOT a slanted bash on MMs. Having been one for many years (as well as having been a major exchange specialist—a now antiquated role that mandated putting customer interests ahead of all else), MMs Absolutely Do Perform an Integral Role within the ecosystem….. But, MMs (Knight and all others) trade at risk when it suits THEIR profit purpose, not because of an altruistic desire to simply facilitate a customer’s investment/trading strategy.

Given the massive institutional use of ETFs, PMs and RIAs, as well as their custodians should [hopefully] hold themselves to a particularly high fiduciary obligation to secure the best available price in the marketplace when buying/selling. If only evidenced by the ongoing attention on Knight, it would seem that many investors (or maybe its just the media) have yet to focus on the notion of aggregated prices and better brokers who systematically canvass all ‘liquidity centers” to capture the best aggregated price based on all of the players interests. It really is that simple, but few people want to deliver this message for various political reasons.

In the ETF world, MMs “accommodate” a customer order ONLY if/when (i) they have first determined that they can capture a risk-free ‘spread’ that exists either at a ‘dark pool’ accessible by the market-maker but not the customer, or (ii) when there is a risk free spread between the cash ETF and the underlying components thanks to the fragmentation of screen-based markets. More simply—if the MM is selling the cash ETF to a customer, the MM will concurrently be buying each of the underlying components –effectively ‘creating’ the ETF-but  only when the aggregate price of the underlying components is less than the price of the cash ETF. Could the customer do the same arbitraging? That depends. But they can certainly use a broker that canvasses the market properly.  

Any market that relies on, or has come to depend exclusively on one primary player is not a marketplace. More importantly- when one player is perceived as the dominant in the space, any snafu will wreak havoc on the market itself and the credibility of the product. In Knight’s case we can look to 2 recent events that created temporary havoc—which is presumably why this firm is about to come under new ownership (again).  

ETF News

Vanguard’s CIO Gus Sauter: Agency Execution is our Preference

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  Courtesy of  Gregory Bresiger.. Excerpts from Part 3 of a series of interviews with Vanguard Chief Investment Officer Gus Sauter

How does Vanguard Funds,’ famous for Fred Mertz like trading economy, go about finding the lowest possible costs? The process is detailed in Part Three of Traders Magazine’s Q&A with Vanguard chief investment officer Gus Sauter.

Traders Magazine: Why have you and your company launched this campaign to change what you perceive as an overpriced market structure?
Gus Sauter: I think transaction costs are surprisingly high.

Traders Magazine: You said in an interview that “a large part of indexing is actually being a trader.”  Does mean that, as with most traders, you’re using algos and using agency traders like ITG or Instinet. How does it work out for Vanguard?
Gus Sauter: We do most of our trading through agency brokerage. We will use brokers’ algos as well if we think that is appropriate for trading. We monitor the transaction costs on a broker by broker basis.

Traders Magazine: Even index fund managers need the same trading skills as though who are actively managing funds?
Gus Sauter: Yes, it really is important that our portfolio managers understand how to trade, how to execute, how to find the right strategies and venues. Should it be an algo or something they are using a dark pool.

Traders Magazine: Higher than most investors think?
Gus Sauter: Yes, a lot of people don’t realize how much money you could spend on transactions if you’re not careful. In other words, we trade hundreds of billions of dollars a year. If you lose , just a half a percent, you’re losing a billion dollars.

Traders Magazine: The implication of what you’re saying is the industry, especially in good times, is incredibly sloppy. Is it because it is other people’s money?
Gus Sauter: Yea, hard for me to tell you. Historically, people have never had respect for the magnitude of transaction costs. They really felt they provided so much alpha in their actively managed funds that they really didn’t have to worry about transaction costs.

Traders Magazine: Not over the past decade…
Gus Sauter: Yes, in a lower return environment people really recognize how much costs are.  And they are devoting more time to how they trade.

 

Full article: http://www.tradersmagazine.com/news/vanguard-sauter-brokers-capital-110393-1.html?zkPrintable=true

 

ETF News

Light On Knight: Editorial Opinion

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Editorial Opinion

In an era in which “CYA” is perhaps the most-used acronym by institutional fund managers focused on fiduciary responsibilities, its almost surprising to notice the many anecdotal remarks that point to a single-point-of reliance on Knight Capital’s role within the ETF marketplace.  Some would think it “shocking” that so many institutions were caught without having a chair when Knight stopped the music and instructed their customers to trade elsewhere.

Yes, based on volume/market share, Knight had become the single-largest “market-maker” for ETFs, as well as a broad universe of exchange-listed equities. Arguably, their pole position is courtesy of pay-to-play pacts with large equity stake holders and ‘strategic partners’ who control significant retail and institutional order flow; including household names such as TD Ameritrade, E-Trade and Blackrock.

This is not to suggest that Knight Capital has not earned its designation for being a formidable market-maker within the securities industry. Their most senior executives are deservedly well-regarded by peers, competitors and clients alike, and their trading capabilities are revered by many.

And yes, Knight’s most recent travails are, to a great extent the result of a  “bizarre software glitch” that corrupted the integrity of their order execution platform. There’s a reason why software is called soft-ware.

That said, this latest Wall Street fiasco–which resulted in a temporary disruption of NYSE trading and the permanent re-structuring of one of the biggest players on Wall Street who was rescued from the brink of total failure– is less about that firm being “too big to fail”,  or the many spirited debates regarding “algorithms that have run amok”, or even the loudly-voiced and often under-informed shouts coming from politicians in Washington regarding the ‘pock-marked’ regulatory framework by which US securities markets operate.

This story is about something much more basic: dependence by seemingly savvy fiduciaries  on a single, market-making firm that figuratively and literally trade against customers in order to administer the daily execution of literally hundreds of millions of dollars worth of retail and institutional customer orders. This happens, all despite the same fiduciaries  commonly inserting the phrase “best execution” within their very own mandates, internal policy documents and regulatory filings.

Many of these fiduciaries may not truly appreciate where Knight resides in the trading market ecosystem, the actual meaning of  “best execution”, or how they can achieve true best execution without being reliant on a single firm whose first priority is not to the client, but to themselves and their shareholders, who depend on the firm’s  ability to extract trading profits when ‘facilitating’ customer orders as being the ultimate metric for the value of their employee bonus and/or their ownership of shares in that enterprise.

CNBC, Barrons, and IndexUniverse (among others) have been following this story closely, and we point to excerpts from a reader comment posted in response to IU’s Aug 6 column  “4 ETF Lessons From Knight”  by Dave Nadig: Continue reading →

ETF News, Tech Talk

Knight Seeks Lifeline After $440 Mil Loss : What’s Next?

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Courtesy of Olly Ludwig/IndexUniverse

Knight Capital (NYSE: KCG), the biggest ETF market maker in the U.S., is seeking financing after saying that a trading glitch involving its systems on Wednesday that affected 148 stocks will result in a $440 million pre-tax loss. The company’s stock was down 45 percent in early morning trade.

“The company is actively pursuing its strategic and financing alternatives to strengthen its capital base,” Knight said on Thursday in a press release, stressing that it will be business as usual for the company in the wake of the wayward trading episode.

The swiftly moving story is one of the more astonishing developments in the world of electronic securities trading, where Knight plays a dominant role. Industry sources say that whatever reputational challenges Knight faces at this very moment pale in comparison to the attractiveness of its business, or at least particular pieces of it.

The Jersey City, N.J.-based firm, the biggest ETF U.S. market maker, said in the press release that while the whole episode “severely impacted” its capital base, its broker-dealer units remain in compliance with net capital requirements.

*Editor insert: MarketsMuse spoke with one industry expert, who requests no mention of his name, but framed the Knight story as follows: “This is exactly the type of episode that should cause institutional fund managers to re-think how/where their orders are executed. Relying on a single market-making firm–which by definition, is counter-intuitive to the notion of best execution–is a recipe for disaster. The right approach is to use a qualified, agency-only liquidity aggregators– firms that focus on capturing best prices by canvassing a broad list of market-makers. The latter approach addresses the PM’s fiduciary obligation, and significantly mitigates dependence on one market-maker, particularly one that may have been perceived for being “too big to fail.”

The Accident That Happened

On Wednesday, Knight saw its stock drop by a third due to the wayward program trading involving its system. The episode was reportedly triggered by a human error that caused hundreds of trades to be executed in minutes instead of over a longer period.

“An initial review by Knight indicates that a technology issue occurred in the company’s market-making unit related to the routing of shares of approximately 150 stocks to the NYSE,” the company said in a prepared statement on Wednesday.

For the full IndexUniverse coverage, click here

ETF News

Conflict-Of-Interest Charges Roil Bankers-What About Those “Step-Out” Ticket Charges?

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Fast on the heels of that New York Times op-ed by a former GoldmanSachs derivatives trader, who in a public farewell tribute to the employer he had just “fired” (claiming said employer caused both the culture and very corpuscles of the firm’s ecosystem to become polluted with the toxic virus “Conflicts-of-Interest Syndrome”),  another, and potentially more blistering conflict-of-interest issue is beginning to bubble.

Before revealing the team logo(s) associated with the latest event,  its important to first look at the update to the saga of the former Goldman trader–who is now actively shopping a new order–for a soon-to-be-written tell all.

In statements released to the press, Goldman, as well as Morgan Stanley have publicly proclaimed the same-sounding, back-handed response re: the Op-Ed author’s revelations regarding conflicts of interest on Wall Street:  The respective bulge bracket PR statements read pretty much like this: “..In connection with ongoing compliance procedures, [our] investment banking unit will be doing a full review of all conflict of interest policies as they pertain to the firm’s internal guidelines, as well as any/all regulatory guidelines.”

Given the compression of the investment banking industry over the past 5 years, its almost impossible to envision that any IB deal administered by any of the few remaining Wall Street banks could be done without some kind of conflict, someplace!

Now to the new shoe that may about to drop, its aimed at the heart of  administrative epicenter for the $3.5 trillion investment advisory space:

According to one agnostic brokerage industry expert (who chooses to remain anonymous because his/her life insurance policy is capped at $1million), those concerned about conflict of interest might be more concerned about a  different conflict: the one that could embroil the $3.4 Trillion (that’s trillion with a “T”)  investment advisory space, which to a great extent, is administered by four or five large, and several smaller “custodians”, whose services typically include reporting, back office administration and trade execution.

Some believe custodians may be reaping  “tens, if not hundreds of millions of dollars in “preference payments” from Wall Street bank trading and “facilitation desks”, in consideration for directing their client orders to those bank trading desks for execution.

In the vast majority of those cases, those trading desks may not actually be providing the best price available in the market, and are also betting against the custodian’s customer, if only for a brief moment in time, to hopefully profit from those bets.  Let us not forget to caveat the important part of the claim: the clients are not receiving any portion of the payments made to their custodian, as the payments may not necessarily be in the form of cash.

The “payment-for-order flow” topic, and more poignantly, the imposition of usurious “step-out fees”  on clients who would rather “trade-away” from their custodian and secure best execution via “agency-only” brokers is an issue that has occasionally sprouted up across the Industry in the form of small brush fires, but most have been quickly extinguished by those having an agenda to brush the issue under the table.

Times may be changing.

Once commission-centric, custodians have since given up the brokerage industry’s race to zero by competing for institutional (and retail) customer in the form of cheaper trading commissions. Instead, fees for execution, research, and other fungible services,  are now based on assets under management, enabling the custodians to to perform a sleight of hand and promote this new message: “Trade commission free, all fees are fixed based on AUM.”

Nothing is free, other than maybe air. According to some, the more recent conflict-of-issue narrative is creating sparks that could turn into a barn-burner–especially for very, very short list of Tier 1 custodians who dominate the hosting of the aforementioned $3.4 trillion in assets; assets managed by RIAs and institutional managers who in turn, actively manage tens of thousands of end-customer sub-accounts via the buying and selling of of single stocks, ETFs, listed options and fixed income products.

Some insist they know, while many others can only suspect, that certain custodians are enhancing their revenue streams at the expense of their own clients, who are otherwise handcuffed to the custodians’ order execution desk.

The handcuff is in form of  “step-out ticket charges”, a fee similar to a ‘corking charge’ that you might be subject to when bringing in your own bottle of wine to the restaurant that you are dinging at. These ticket charges, which range from $15-$25, are  imposed on each sub-account when the custodian’s client wants their order executed “away” by any “agency-0nly”  firm who  specializes  in seeking out the most competitive price, or best execution in that particular asset class.

To illustrate: Joe RIA intends to purchase a block of 50,000 shares of EMG-ETF on behalf of his 100 clients. After execution, he will pro-rate 500 shares to each of the 100 client sub-accounts that Joe RIA manages.  When Joe executes through “Clark His Custodian”, there is no commission charged on the trade, and no ticket fees imposed to allocate to sub-accounts managed by Joe and held in custody by Clark . Great deal, right?

If you missed the (*) asterix that pointed to the small print in your clearing agreement,  “If you want to step-out your order to a third party broker in an effort to secure a better price execution, please note: you will be subject to a fee of $15-$25 for every sub-account that you want your block trade allocated to.”

This is where the burning rubber meets the road: When Joe RIA discovers he can execute the 50,000 shares 5 cents ‘better’ via a third-party broker (a savings of $2500 that goes directly to Joe’s Alpha), Joe also discovers that he’s subject to a $25 ticket charges per account,  wiping out the cost savings that Joe could have captured for his clients.

Executing at a ‘better price’ is actually not that hard accomplish for seasoned execution experts in the course of trading a majority of ETF products (or other products, such as  option spreads)–especially those who take a systematic approach to canvassing a broad assortment of liquidity providers.  Clark the Custodian has no incentive to spend time/effort to canvass the market. His only obligation is to deliver prices back to his clearing customer within the context of the NBBO.

Its a strange story, for sure. Something is certainly amiss when it costs “nothing” to execute “in-house”, but if you go out of house for a better price execution, you find yourself in the proverbial out-house,  without any TP.

Stay tuned.