Best execution and transaction cost analysis (TCA) have been critical components of stock trading for years, but were still considered emerging in the crypto market – until recently. Greg Tishelman, director of crypto sales at OneMarketData, explains to BEST EXECUTION the challenges (and opportunities) of applying data analytics to digital assets.
The rapid growth in the crypto market and the corresponding rise in new and increasingly sophisticated crypto-focused trading technology has made traders realize that they need new ways to optimize their crypto trading strategies, ensure regulatory compliance and better results for achieve their clients and firms.
The evolution of best execution
Best execution (best ex) refers to the process of executing trades at the best possible price and with minimal slippage. An important factor in achieving best execution is order routing, where traders decide where to send their orders when placing the trade to get the best possible execution. This may involve splitting orders between multiple exchanges or trading platforms to take advantage of the best prices and liquidity available.
Before best ex was introduced, traders would buy and sell securities in the financial markets and focus on executing those trades quickly and at the best possible price – often without considering the factors that could affect the quality of that trade . Traders will often rely on their personal experience / judgment and other limited information to decide how to execute trades. This was often an opaque process as most traders had limited visibility into how their orders were being executed, at what price and whether they were getting the best execution for their trade.
The emergence of best execution regulations has made it mandatory for traders to consider speed, price, probability of execution and more when completing a trade. And as the industry strove to deliver more transparency and accountability in financial markets, it ushered in a new era in the development of sophisticated trading algorithms.
Best ex meets the crypto trader
Crypto traders today recognize the value of taking Best Ex best practices from the stock trading world and adapting them to the unique characteristics of the crypto market. But crypto traders must also consider a range of different factors when it comes to the best ex, including liquidity, trading volume, bid-ask spreads and market volatility. They must also navigate a host of algorithmic trading tools that can help them execute trades more efficiently, analyze market data, identify trading opportunities, and execute trades quickly and accurately.
Crypto markets are decentralized and volatile by nature – and that’s just one reason why the best ex has emerged so critically in this space. Crypto traders may need to execute trades quickly to take advantage of price movements while ensuring they secure the best possible price and avoid slippage – and the best ex allows them to minimize the impact of market volatility on their trades by ensure that their orders are executed at the best possible price. This enables them to minimize the risk of losses due to price fluctuations, improve the overall profitability of their trading strategies and help avoid conflicts of interest by ensuring that orders are executed fairly and transparently – without undue influence from brokers or other market participants.
A new level of insight: Transaction cost analysis takes center stage
Transaction cost analysis (TCA) is a method of evaluating the costs associated with executing a trade and is commonly used in traditional stock trading to evaluate the costs of buying and selling securities. Crypto traders quickly realized how valuable this could be to them. TCA tools allow crypto traders to identify the sources of costs associated with executing trades, such as bid-ask spreads, market impact and order routing fees.
TCA is particularly beneficial to crypto traders due to the unique characteristics of the market, specifically:
High volatility, which can have a significant impact on trade execution costs. TCA can help crypto traders identify the impact of volatility on their trades and adjust their strategies accordingly. Low liquidity, which can make it difficult to execute transactions at the desired price. With TCA, crypto traders can identify sources of liquidity and associated execution costs to optimize trading strategies. Fragmentation due to multiple exchanges and trading platforms operating in different regions and with different liquidity profiles. Crypto traders can use TCA to evaluate execution quality across different venues and pinpoint the best places to send their orders. Lack of regulation and no universal standard for what is the best ex. TCA provides the means to evaluate execution quality based on a trader’s own criteria and objectives to achieve the best possible outcome for their trades – and clients.
Historically, the challenge of applying TCA to crypto trading has been the lack of standardized data. With stock trading, trade data is typically available from a centralized source – but crypto trade data is often spread across multiple exchanges and platforms, making it difficult to collect data and perform meaningful analysis. However, with the growth of cloud computing and data analytics, it has become easier and more affordable for crypto traders to collect and analyze large amounts of data. Data analytics tools have become more powerful, with machine learning algorithms that can quickly analyze large data sets and identify patterns and trends.
These advances in data analytics technology have made it easier for crypto traders to perform TCA. Traders can now collect and analyze large amounts of data from various sources, including trading platforms, market data feeds and blockchain data. This has made it possible for crypto traders of all sizes to use TCA to improve their trading performance, reduce costs and meet regulatory requirements.
The road to institutional adoption
The crypto market continues to mature — and with it comes increased scrutiny from regulators, media and institutional investors. It is imperative that crypto traders embrace the necessary tools to better navigate the decentralized and often volatile nature of these markets, clearly demonstrate best execution and deliver the transparency that market participants will demand. Only when they can improve trading results, reduce risks and ensure regulatory compliance will they establish the confidence needed for the institutional community to fully embrace this rapidly evolving market.
©Markets Media Europe 2023
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While we love diving into the exciting world of crypto here at Uncirculars, remember that this post, and all our content, is purely for your information and exploration. Think of it as your crypto compass, pointing you in the right direction to do your own research and make informed decisions.
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