Cash Equity Transaction Cost Analysis

this paper describes the role of Transaction Cost Analysis in the fulfilment of the best execution obligation as well as the limits of existing frameworks.

Author(s):

Jean-Rene Giraud

Director of Development and Research Associate with the EDHEC Risk and Asset Management Research Centre

Catherine d'Hondt

Associate Professor, EDHEC Business School

MiFID is the second step in the harmonization of the European capital markets industry and intends to adapt the first Investment Services Directive (ISD 1 issued in 1993) to the realities of the current market structures. After having clarified the nature of the new regulation, this paper first describes the role of Transaction Cost Analysis in the fulfilment of the best execution obligation as well as the limits of existing frameworks. Then, the paper presents a new methodology that makes it possible to measure the quality of execution as part of peer group review and identify whether the broker, trader or algorithm has implemented the execution too aggressively or too slowly. This approach relies on a couple of indicators allowing an easy comparison of a large universe of trades and providing insightful information not only about the final performance (EBEX absolute indicator) but also about the possible justification of the performance (EBEX direction). In order to illustrate both the framework and the level of interpretation made possible, the results of a preliminary study conducted on 2737 orders on Euronext blue chips over a 4-month sample period are reported.
Pdf
Cash Equity Transaction Cost Analysis...
(827.82 KB)
Type: Working paper
Date: le 20/10/2008
Extra information : Pour plus d'informations, nous vous prions de vous adresser à Séverine Anjubault, Direction de la recherche de l'EDHEC [ [email protected] ] Les opinions exprimées sont celles des auteurs et n'engagent pas la responsabilité de l'EDHEC.
Research Cluster : Finance

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