Trade Cost Analysis: True Trade Costs for Buy Side Firms

Trade cost analysis is a service that can help expose the costs of trading, and pave the way for reducing these costs. Understanding the size and sources of these costs as they are incurred by the daily activity of your funds is the process by which these analyses operate.

An important factor is the role of commissions, fees and market. A trade may result in an expense to investors that outweigh the income gained through commissions and fees. Understanding where your trade costs fall when compared to the global and US markets is an important indication of your position, and can be obtained by looking at trade information across the markets.

Many companies offering trading cost analysis had access to large databases of actual trade data with data stored across 47 countries, and time stamped where possible. This data can be used to directly compare with your company, showing how your costs compare, and giving indications of places for improvement.

'Selling' is a term used in the investment industry (also known as the financial services industry) to refer to a firm that sells investment services. Typically these are sold to corporate businesses or asset management firms. Investment services refer to a range of functions, including brokering trades, investment banking, advice and sell side research. Sell side research involves producing reports on public companies and recommendations on whether to buy or sell stock.

Traditionally, sell side research costs have been combined with the costs of trading stock. Current trends are towards the unbundling of the two. This is leading to increasing presence of external research instead of through the sell side. This unbundling allows for a clearer determination of trade costs, and where changes need to be made to minimize these.

The buy side firms are asset management firms that use the services from the sellers. The buy and sell side may be separate businesses, but many times a business may incorporate both a sell and a buy side. Understanding the cost of trade individually and collectively for both sell side and buy side firms is an important component of trade cost analysis.

Analyzing trade costs is an important process regardless whether you are a buy side firm, sell side firm or a firm that undertakes in both activities. Many companies offer trade cost analysis using large databases of up to date information to perform the analysis quickly and effectively. Understanding the trade costs, their magnitude and their source is the first step towards reducing the costs and increasing profitability.

Do you sell services to buy side firms? If so, you need to keep up with the latest Sell Side Research.