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Cowen Execution Services Limited: Trading venues and qualitative report for execution obtained for 2017

Cowen Execution Services Limited (“CESL”) is subject to the EU’s Markets in Financial Instruments Directive 2015/65/EU (“MiFID II”) and related Commission Delegated Regulation. Under these requirements CESL is required to publish its top execution venues and a summary of quality of execution obtained.

As CESL’s order routing policy explains, CESL routes all orders to its US affiliate Cowen Execution Services LLC (“CES”), which is registered as a broker-dealer with the U.S. Securities and Exchange Commission and is a member of the Financial Industry Regulatory Authority (“FINRA”).

For executions outside of US markets, CESL’s Client orders are routed to execution venues via CES’s direct relationships with local third-party execution entities. For executions in US markets, CESL routes orders to CES and CES will generally execute such orders directly on US based execution venues.

CESL does not maintain direct relationships with any third-party execution brokers, nor is a member of any regulated markets (“RMs”), Multilateral Trading Facilities (“MTFs”) nor any other third-country trading venues. Furthermore, CESL does not operate a Systematic Internaliser (“SI”) nor trades in a principal capacity. As a result, CES receives 100% of CESL’s order flow for execution.

Via CES’s relationships with local third party execution brokers CESL accesses trading venues worldwide and leverages off trading technology and a broad range of solutions to access diverse sources of liquidity in order to deliver consistent, performance-driven results.

CES/CESL believe that routing orders via third party execution brokers enables it to obtain results for its Clients that are at least as good as the results it could reasonably expect to obtain if CESL was a member of execution venues in its own right.

CES/CESL aims to take all sufficient steps in order to obtain the best possible results for its Clients by selecting execution entities, i.e. third party executing brokers, with access to execution venues where CESL considers it can consistently achieve best execution. CESL is of the view that being a member of execution venues would not increase execution quality or keep down commissions and other related costs.

Table 1: Top 5 Venue Analysis for Equities

 

Class of Instrument Equity
Notification if < 1 average trade per business day in the previous year N
Top five execution venues ranked in terms of trading volumes (descending order) Proportion of volume traded as a percentage of total in that class Proportion of orders executed as percentage of total in that class Percentage of directed orders
Cowen Execution Services LLC 100% 100% N/A

 

Table 2: Top 5 Venue Analysis for ETF’s

 

Class of Instrument ETF
Notification if < 1 average trade per business day in the previous year N
Top five execution venues ranked in terms of trading volumes (descending order) Proportion of volume traded as a percentage of total in that class Proportion of orders executed as percentage of total in that class Percentage of directed orders
Cowen Execution Services LLC 100% 100% N/A

Within the spirit of the MIFID II’s regulatory framework and in the interest of transparency, we are showing the execution venue analysis for CES for its trading in MiFID II related assets. We have used sample data for a limited time period during 2017. We are of the view that the analysed data set is representative of CESL’s execution flow in MiFID II assets for the full year 2017. As CESL/CES only trades in equity instruments we have only prepared the tables for “Equity”” and Exchange Traded Funds” (“ETFs”).

During 2017, we changed OMS provider which resulted in use of multiple data sources in order to obtain a relevant data set for the full year. Furthermore, we worked with our third-party execution brokers to implement the systems in order to log and monitor this information, including ensuring that our brokers send us correct industry standardised MIC codes consistent with ISO 10383.

In order to provide our summary of quality of execution obtained we worked with our third-party provider for transaction cost analysis (“TCA”) and best execution monitoring in preparing performance benchmarking and execution quality analysis.

The execution venue analysis for CES in MiFID II instruments is as follows:

Table 3: Top 5 Venue Analysis for Equities

 

Class of Instrument Equity
Notification if < 1 average trade per business day in the previous year N
Top five execution venues ranked in terms of trading volumes (descending order) Proportion of volume traded as a percentage of total in that class Proportion of orders executed as percentage of total in that class Percentage of directed orders (*)
LONDON STOCK EXCHANGE (XLON) 13.29% 9.79% N/A
XETRA (XETR) 12.21% 5.29% N/A
WARSAW STOCK EXCHANGE/EQUITIES/MAIN MARKET (XWAR) 11.22% 24.41% N/A
CBOE EUROPE – CXE ORDER BOOKS (CHIX) 6.76% 9.93% N/A
EURONEXT – EURONEXT PARIS (XPAR) 6.54% 2.79% N/A

 

Table 4: Top 5 Venue Analysis for ETF’s

 

Class of Instrument ETF
Notification if < 1 average trade per business day in the previous year N
Top five execution venues ranked in terms of trading volumes (descending order) Proportion of volume traded as a percentage of total in that class Proportion of orders executed as percentage of total in that class Percentage of directed orders
XETRA (XETR) 29.11% 35.67% N/A
LONDON STOCK EXCHANGE (XLON) 26.12% 29.14% N/A
EURONEXT – EURONEXT PARIS (XPAR) 15.99% 10.65% N/A
BOLSA DE MADRID (XMCE/XMAD)[1] 6.56% 0.11% N/A
CBOE EUROPE – CXE ORDER BOOKS (CHIX) 3.85% 3.55% N/A

The proportion of volume analysis is based on the market value in USD as the FCA has informally indicated that the volume of client orders will be the market value of the transaction.

The proportion of orders analysis is based on the number of orders sent to the venue as the FCA has informally indicated that the number of orders will be the number of client orders, rather than the number of shares or units, or number of suborders into which a client order is divided.

(*) We have intentionally left out the percentage of directed orders as our data set does not currently provide sufficient level of data to assist us in preparing a representative percentage for this information.

CESL summary of quality of execution obtained for 2017.

As indicated above, CESL is required to publish an annual summary of the analysis and conclusions it draws from its monitoring of the quality of execution obtained on the execution venues and through the brokers used.

In accordance with our Order Execution Policy and MiFID II, Article 27(1), the definition of best execution is the obligation on firms to “take all sufficient steps to obtain the best possible result for their clients, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to execution”. This report details the processes, systems and procedures employed by CESL to implement, monitor and evaluate our Order Execution Policy, the relative importance given to the execution factors and explaining any factors that led to changes in the list of execution venues listed in CESL’s Order Execution Policy during 2017.

CESL accesses over 100 markets globally through CES and as indicated above orders are routed to execution venues via CES’s direct relationships with local third-party execution brokers. CES is charged a set fee per market and does not have any specific arrangements with specific execution venues with regard to payments made or received, discounts, rebates or non-monetary benefits, therefore CES does not have any close links, conflicts or common ownership with any of the venues or third-party brokers used to execute orders which means that the routing logic is un-conflicted by such issues. CES does not charge any additional fees to CESL over and above the fees that CES is charged by local third-party execution brokers.

The local third-party execution brokers used by CES have been reviewed regularly against quantitative and qualitative factors, including performance, venue access, SOR functionality & flexibility, costs and settlement performance. Overall, we have not identified any particular issues of concern that would have required us to replace or seek alternative trading venues for the purpose of achieving best execution.

Price has always been viewed as being of highest relative importance in obtaining the best possible result. However, all key execution factors were considered in light of the execution criteria. The assessment of these considerations determines the appropriate interaction with the relevant third-party execution broker and/or trading venue when clients provided us with discretion.

CESL gave priority to price and speed in order of importance. However, the nature or circumstances of an order may have resulted in the relative importance of the execution factors to be different.

In reviewing executions, CESL routinely considered the time interval (latency) between an order being received by CESL and its execution as well as the time interval (latency) between an order being received by one of the execution entities and its execution.

Cost of execution is generally considered as the total trading costs faced by the client. CESL regularly assessed execution costs as part of its order routing decision process and by assessing price, cost and likelihood of execution.

In executing orders, CESL considered the likelihood of execution in terms of the risk of not being able to execute orders on different venues or the probability that orders may not have been filled within a given time period. Similarly to execution factor of ‘price’, CESL routinely assessed likelihood of execution by measuring latency comparisons, per broker/per market.

CESL also routinely assessed any failures to execute per broker/per market as part of the order routing decision process.

Settlement was considered in light of the risk of settlement failures or delays in settlement.

For all trading venues, CES implemented a primary, secondary and tertiary broker route to ensure seamless transition during periods of IT outage and to allow for dynamic re-routing of orders when execution quality standards were not met.

CESL used a third-party vendor product for its best-execution surveillance/monitoring and TCA. CESL trading desk has continuously been working on embedding the best-execution monitoring/surveillance solution to conduct and review individual executions outside set benchmark parameters.

In certain recent instances, the monitoring/surveillance solution found that the price of an execution versus the prevailing market price that reflected the best possible price that could have been obtained by routing a single aggressive order was worse than that which could have been achieved.

Our best execution monitoring/surveillance solution allowed for detailed order book replays, utilising market data from individual executions venues and further enhancing the investigative tools for CESL’s trading desk.

From time to time there were recent instances were a particular execution could have achieved marginal improvements on price. However, when reflecting other factors such as settlement risk or cost to the client (due to higher commission rates for trading on that venue) the alternative execution did not reflect best execution for the client.

In situations when there were not mitigating factors for a particular execution not meeting our best execution requirement, CES/CESL followed up with the relevant third party brokers regarding the reviewed cases and, as applicable, requested them to address necessary changes accordingly.

By checking our executions against the market on a fill by fill basis allowed us to verify that we were achieving best execution. The key monitoring process to determine this was by measuring spread capture. A spread capture of 0% would mean that we crossed the far side of the spread for each execution and a negative number would indicate that we achieved a worse than the prevailing market price on average. We are satisfied to report that based on the available execution data for FY 2017 for equities, we captured 35.06% of the spread at the time of execution. Overall for ETF’s, we captured 57.94% of the spread. In short, this shows that we did not pay more than the best bid/offer at the time of execution and as such delivered price improvements by not routing 100% of orders and crossing the spread.

On a regular basis, CESL reviewed all broker performance, focusing on algorithm strategy performance and venue analysis. CESL’s also reviewed broker access, and utilisation of execution venues with overlaying venue market share to highlight potential issues of venue conflicts with its third-party brokers.

Orders that were executed algorithmically were subject to monitoring by the CES’s ‘algo team’ which has full visibility of algorithmic orders, on both a real-time and historical basis. As applicable, order executions and parent-order performance which fell outside designed tolerances were investigated. Further, the ‘algo team’, in conjunction with the front-office, met weekly to review development schedules for algorithm enhancements, reacting to and pre-empting changes to market microstructure, types of liquidity on a venue(s), changes to order types and regulatory change.

CESL Best Execution Committee is responsible for the oversight of CESL’s overall business activities as it relates to fulfilling its best execution duty, and to evaluate the quality of executions by CESL.

Following the completion of our best execution assessment for trading activity during 2017 we are satisfied that we, via CES’s third-party broker relationships acted in accordance with the scope our best execution framework as outlined in Order Execution Policy.

Overall, we are satisfied that our best execution process has provided clients, best possible execution under prevailing circumstances.

In conjunction with CES, CESL is continuing to adapt its best execution process to regulatory and market microstructure changes and will be adding new trading venues adapting routing structures.

The introduction of more-robust analytical systems will result in more detailed and quantitative assessments being made for future trading activity and deeper reviews of execution data with CES and its third-party brokers.

[1] Effective 3 January 2018, Spanish Financial Instruments currently identified via the Market Identifier Code (MIC) “XMCE” will be identified via the MIC, “XMAD”.