Evaluating broker performance is a critical part of best execution for the buy-side. Traditionally, broker scorecards are used in the context of measuring the overall value of the broker to the buy-side client. The focus has been on topics like quality of research, corporate access, client service and other factors primarily focused on Fund Managers and portfolio construction. These scorecards did not emphasize brokers execution quality. However, changes in both regulations and technology are contributing to a greater use of Broker Scorecards in the Buy-Side. Best Execution committees regularly use scorecards to measure and monitor execution quality. Buy-Side clients also use scorecards to further dialog with their brokers that result in improved performance. Finally, the methodology used here can be easily adapted to Algo evaluation and used as an input into Algo Wheel decisions.
A trading oriented broker scorecard focuses on how effectively the Broker’s execution strategies interact with trading venues. We use 6 different metrics to assess broker execution quality. The focus is on the sourcing of liquidity and metrics emphasize price improvement, size of execution and minimizing post execution information leakage.
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By Henry Yegerman, ISS LiquidMetrix