Transforming Trade Data Analysis to Find Alpha

As seen in Institutional Investor

Finding alpha is increasingly challenging for asset managers, and changing conditions are just one contributor to that reality. Data science technologies and artificial intelligence are quickly advancing, and managers that are slow or inefficient in utilizing innovations can find their business threatened by competitors with more agile, cost-effective strategies to analyze trading and market data, and drive consistent improvement.

In particular, recent technology leaps have enabled asset managers to access advanced trade analysis that, just a few years ago, only the largest firms performed. Today, managers and owners can tap an outsourced partner, like Northern Trust, that brings expertise and technology from cutting-edge analytics firms to provide data analysis across the trading lifecycle – from the initial idea to post-trade activity – generating a feedback loop that can help to improve decision-making at every step.

We spoke to Stephanie Farrell, Northern Trust’s Head of Integrated Trading Solutions for North America, Clare Flynn Levy, CEO/Founder of Essentia Analytics, and Greg McCall, President/Co-founder of Equity Data Science (EDS), to get more details on how their collaboration is giving asset managers modern insights on their activity – and new paths to alpha.

How has better access to data changed how managers look at their processes? 

Stephanie Farrell: Data management presents many challenges for asset managers. There’s a high volume of data they must ensure is accurate when making investment decisions. Another challenge is data accessibility. Many firms operate within different silos which makes it challenging for managers to share data with both internal and external stakeholders. To have a well-functioning operating model, organizations need their talent to focus on the higher-value analytical activities rather than consolidating or enhancing data. And there are new technologies and solutions in the marketplace that allow managers to make data more accessible and easier to manage. Through our collaborations with Essentia Analytics and Equity Data Science, we’re bringing these new solutions to clients.

Clare Flynn Levy: Only recently have advances in data science made it possible to look at what managers do well and where they repeatedly make mistakes. Most fund managers know that the key to achieving success, performance-wise, is to focus on the entire process and not just the outcome. But until recently, they only had outcome data. That only tells you what happened, and not anything that’s helpful on a go-forward basis.

Today, we have the analytical capability to take trade data and turn it into behavioral analytics, so a manager can pinpoint the types of decisions they make well – and identify the circumstances in which they repeatedly get it wrong. This allows them to invest their energy into doing more of the things that make money, optimizing their process.

Greg McCall: Traditionally, only the largest institutions could invest millions in building the analytical capabilities to try to understand the trading and investment decisions they’re making. But that’s changed. Recent advances in data accessibility have now given firms of all sizes the ability to use high-performance, low-cost methods to capture data and bring it into their processes.

That’s not enough, however. Equally important and a big driver today, to truly improve decisions, that data must be usable to the front office, portfolio managers, analysts, traders, and other key players. So, we’ve really focused on empowering investors to get the data they need and use it most effectively in their decision-making processes.

“ Traditionally, only the largest institutions could invest millions in building the analytical capabilities to try to understand the trading and investment decisions they’re making. But that’s changed.”

Greg McCallPresident/Co-founder, Equity Data Science

Can you describe a way in which technology enabled better analysis of data, and more specifically, trade data? 

McCall: Consider vendors such as Snowflake. They essentially offer a data warehouse in the cloud that’s made real time, high-performance analytics cost effective. Clients can run post-trade and pre-trade data analytics in seconds, at any time. And that’s made a big difference to managers who, in the past, may have only run analytics and risk reports monthly. Now they can do it on the fly. With access to Snowflake technology, along with other Northern Trust solutions, managers can share data and bring multiple analytics, decision-support and reporting workflows and workstreams together in advanced ways.

Farrell: Without modern platforms and key tools, it is incredibly onerous for an asset manager to keep up with the latest advances in technology. By collaborating with industry-leading firms, like EDS and Essentia, Northern Trust can bring a technology set to our clients that they may not have previously been aware of. It starts with due diligence, looking at it from a holistic needs assessment and talking to clients about sharing data across providers, so gaining these capabilities can be a seamless transition for them. That’s our role and the value that we can bring by assembling all these tools under one roof, and then linking providers and firms together to share data. We make it easier for our clients to do business with us and their other partners.

Why is it more important today to be able to analyze decisions from pre- to post- trade? 

Flynn Levy: Because it’s harder to find alpha than it ever has been. Being smarter or having better information than competitors isn’t a reliable alpha-generation strategy anymore. If you can’t analyze your decisions from pre- to post- trade, then you can’t prove your investment process works and you can’t continuously improve it. In a world where active fund managers haven’t been outperforming index funds, on average, being able to use data about the investment process to home in on where your investment skill resides, as well as to mitigate your behavioral biases, is a matter of survival.

It’s the same thing that has transformed the world of sports. Investment managers are coming to the same realization that scouts and team managers came to over the last few decades: it is possible to do better if you can optimize your process - and that requires a data-driven feedback loop.

McCall: And customers are demanding it.

Farrell: That’s a great point, in terms of the level of transparency and sophistication that asset owners require from managers today. They’re requiring their managers to go beyond ticking the box of post-trade TCA reports that get shelved. They’re looking for managers to really prove it out and have the information to support the investment decisions that they’re making. So, our clients are turning to us because they need a more sophisticated tool belt. By bringing together these solutions, we’re allowing our clients to hit those needs from all angles.

“ If you can’t analyze your decisions from pre- to post- trade, then you can’t prove your investment process works and you can’t continuously improve it.”

Clare Flynn LevyPresident/Founder, Essentia Analytics

If a manager outsources its trading to Northern Trust, what analytical capabilities are available for them through this relationship?

Farrell: One of the key benefits we see in clients that fully outsource their trading to us is, first, we give them the ability to centralize their trade data and use it in ways that other providers may not offer.

This includes running pre-trade analyses that allow our traders to have more informed conversations with our clients, so they can design and implement an effective trading strategy and assess the market impact. We empower clients to take a far more robust look at their pre-trade process. What is the intention? What are the goals? This examination really adds value in helping us understand the intent of that order before we take it to market. And it allows for a much tighter collaborative approach, as clients can utilize Northern Trust not just for trade execution but to help with the planning leading into that trade.

In terms of post-trade, we offer a robust TCA package that utilizes different benchmarks and weights to create a deeper feedback loop. We help clients assess a trade from many different angles, and take insights back to their investment team to answer, “What could we have done better?”

Through our collaboration with EDS and Essentia, we can provide a holistic set of tools to support our clients through the entire lifecycle of a trade – from the initial investment idea to the placement of the trade, and then post-execution. We can become an extension of our clients’ investment processes.

“ Through our collaboration with EDS and Essentia, we can provide a holistic set of tools to support our clients through the entire lifecycle of a trade… We can become an extension of our clients’ investment processes.”

Stephanie FarrellHead of Integrated Trading Solutions for North America, Northern Trust

Learn more about outsourcing solutions from Northern Trust.