Australian super funds could pass on significant cost savings to members by controlling trading costs within their portfolios, according to the director of sales and trading at Investment Technology Group (ITG).
The financial technology firm this week launched a new equity trading algorithm, which it claims could significantly reduce trading costs for super funds at a time when funds are struggling to recoup billions in losses.
The launch of the algorithm, called “Active”, follows the introduction of the ITG Flexible Participation program in October last year. The algorithms react to real-time market moves and aim to help funds managers improve trading performance.
Michael Corcoran, director of sales and trading for ITG in
Australia, said by reducing trading costs, super funds could achieve a better outcome for members.
“When the end investor’s been looking at negative returns for the first time for a long time, anywhere these funds can be saving money is going to be a bonus and a focus,” he said.
“Definitely… controlling your trades and the cost of trades is a big way for the super funds to ensure that more money is retained by the end investor.”
He added: “It’s all about understanding trade costs. These algorithms are an important way of being able to control the orders and reduce those trade costs.”
ITG research into the effect of volatility on bid/ask spreads and trading costs in
Australia showed that, between 2007 and the end of 2008, expected trading costs increased by over 150 per cent.
The likelihood of incurring trading costs far greater than the average more than trebled by up to 350 per cent during the same period.
Active aims to closely track an arrival price benchmark, for example the price at the time the portfolio manager issues the instruction to trade, and will speed up or slow down depending on price, how much volume it has to trade and what the market is doing at a given time.
It combines two trading styles: steadily trading at
the current bid or offer price to avoid moving prices, then more aggressively
taking liquidity when prices are favourable and to ensure the order gets
completed in time.