UK - Schemes looking to cut costs through electronic trading could end up increasing volatility and risk, Frank Russell Company warns.
Such equity trading – termed “crossing” – is typically used to avoid large fees accrued when using traditional broker services following a switch of mandates between fund managers.
But Frank Russell managing director of implementation services Adrian Jackson warned that there is a potential for transition strategies – that simply aim to maximise crossing in the name of cost-saving – of being counterproductive.
He stressed: “The key problem with crossing is the uncertainty built into the process.”
Jackson explained that shares can only be crossed if there are matching bids or offers on the electronic trading network, meaning that a mandate’s starting and finishing position become difficult to gauge. This significantly increases volatility.
He added that, although many people are aware of the benefits of crossing, they do not fully understand some of the pitfalls the method brings.
“Crossing is one tool at the disposal of the transition manager, but it certainly isn’t the goal.
“Unless a crossing network provides you with appropriate risk tools to control what you actually trade, research shows that it is consistently easier to buy a bad stock on a crossing network than to buy a good one,” he said.
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