Part One of a Three Part Series
In a recent online poll, we asked equity managers in the wrap/custodial space: “What is the biggest barrier to aggregating orders and trading away from these platforms?” While 15% responded that they already traded away, a full 85% provided reasons for the continuation of the rotation process.
For the uninitiated, trade rotation is the process whereby orders are executed in a set rotation or queue, rather than being executed in a single block. Trade rotation has historically been the default process employed by institutional managers sub-advising wrap/custodial assets. However, most managers would agree that executing a single block would be preferred.
Barriers solving the trade rotation issue:
Operational complexities (45%): The most common reason cited was operational complexities. If you manage assets on wrap/custodial platforms, you know how time-consuming it can be to “work up” an order. If you manage assets on multiple platforms this task can become a job in itself. Now consider how you would consolidate these orders, trade away, report transaction details and provide the necessary disclosure…Operational complexities are real.
Trades away fees (30%): The fact is that some wrap/custodial platforms still charge fees to trade away. While some may be as little as $3.00, others are more than $25.00 per trade away per client account. Unless you can negotiate trade away fees, these may cause the economics to support rotation.
In the “Other” category, one comment summed it up nicely…”Old habits just won’t die.” In today’s highly technological trading ecosystem, it is hard to imagine how a manual and time-consuming process like trade rotation can continue. Old Habits Die Hard may explain a lot.
Finally, the elephant in the room…trading away generally results in commissions (markup/downs) being paid by wrap clients even when fully disclosed.
In Part II of this three-part series, we will look at the question…Does it makes sense to overcome these barriers and eliminate trade rotation? Spoiler alert…the answer is “Definitely”, “Maybe” and “Sometimes.”
Comments on this series are appreciated as we hope to prompt discussion within this group of practitioners and experts.