Why it’s not so simple when you hit the trade button (part 2)

Interview with an order flow manager

By Franklin Gold

The second part of my interview with Jay Owen, former order flow manager for Fidelity Investments. For part 1, click here.

Franklin - On a more strategic basis – what did you do?

Jay – We had monthly conversations with all our execution venues. We reviewed the quality of their executions, any issues we had with them, and areas where we wanted to see improvement. We discussed performance and competitive results.

We also did annual due diligence visits with these execution venues. That was a good time to have a much more in-depth conversation and review from the prior twelve months. They were also important in relationship building. While much of the day-to-day is automated, relationships are still important. Sometimes, you needed a favor in improving an execution. Your relationships helped get the answer you needed for the benefit of the customer.

Franklin - What is best execution? How do you measure it, track it?

Jay – The pursuit of best execution is a process, not a static number. It’s about making a commitment to excellence through continuous improvements.

You don’t look at one order or statistic. It’s about price, time and size. You need good surveillance tools; therefore, it’s important to embrace technology. And best execution continues to evolve.

Franklin - Tell me about the differences in how you approached different types of orders – market orders vs. limit orders - what are the key things that you’d look for?

Jay – For every order, you look at the order type, order size, what’s being displayed in the market and market conditions. For a market or marketable limit order, the focus is on speed of execution and the effective to quoted spread. For non-marketable limit orders, the focus is on fill rates and price improvement.

Franklin – In order to protect customer orders, what kinds of situations were you prepared to address quickly and what did you do?

Jay – Contingency planning was a crucial part of our job. You need to be prepared all the time for catastrophic failure. This means that you need to keep alternative trading venues/channels at the ready.

The most critical priority if there is an issue, is getting the trade done. Price adjustments may be necessary after the fact, but price corrections are relatively small compared to what could happen if a customer’s trade doesn’t occur. Risk increases with time.

There are many potential sources of failure. Connections to market centers can go down and orders can be hung. Trading destinations might be experiencing technical difficulties. Wholesalers can fail. For whatever the cause, our alternatives needed to always be hot and ready to go.

Part 3 of the series can be found here.