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AAM Best Execution Comparison Report
Overview
This document describes the methodology used to create the Best Execution Comparison Report that can be accessed on our website at http://www.aamlive.com. This report is available only to home office management personnel at your broker-dealer firm that have been granted password access to the report. For access to the report please contact your AAM relationship manager.
The Best Execution Comparison Report covers municipal and corporate bond trades only. Municipal bonds are compared to reported trades from MSRB’s Real-Time Transaction Reporting System (RTRS) and corporate bonds are compared to reported trades from FINRA’s Trade Reporting and Compliance Engine (TRACE). The user can select a time period to run the report by entering a start date and an end date. The start date must be 9/1/2010 or later and the end date can be any date up to the close of business the day prior to running the report.
The purpose of the report is to highlight trades conducted by your firm with a customer that are above the market (in the case of a sell to your customer) or below the market (in the case of a buy from a customer). The report will enable you to review trades that appear to be away from the market and determine whether or not any action needs to be taken.
The report compares the price that your customer paid (or received) for the bond to the highest reported price that other investors paid (or the lowest reported price that other investors received) as reported in “customer” trades on RTRS or TRACE. Trades reported as inter-dealer trades on RTRS and TRACE are not included in the comparable trades in the report.
Report Description
The comparable trades are selected as follows:
Same CUSIP as the bond your firm sold to or bought from your customer.
Same side of the trade – if your firm sells the bond to your customer the report only compares your trade to reported sells to customers. If your firm buys a bond from your customer the report only compares your trade to reported buys from customers.
The report compares transactions on the same trade date in the case of corporate bonds.
The report compares transactions during the last 10 trading days in the case of municipal bonds. This is because most municipal bonds trade infrequently.
The number of comparable trades identified by the above criteria appears under the column titled “Reported Trade Count”. In the column titled “Buy/Sell,” “Buy” indicates that your firm bought the bond from AAM and your customer bought the bond from your firm and “Sell” indicates that your customer sold the bond to your firm and your firm sold the bond to AAM. The column titled “Reported Max/Min” shows the highest (in the case of a sell to your customer) or lowest (in the case of a buy from your customer) reported customer trade price according to RTRS or TRACE (excluding your customer trade). The column titled “Retail Client Price” is the price at which your firm conducted the subject transaction with your customer.
The report is always sorted so that the trades that look away from the market are at the top of the report. The column titled “Difference” shows how far the customer price is from the highest (sell to your customer) or lowest (buy from your customer) reported price. Positive numbers may indicate that the price was away from the prevailing market. Low numbers and negative numbers may indicate that the trade is within or below the prevailing market.
Limitations of the Report
Although we have done our best to provide an accurate, meaningful report, there are some significant limitations due to limited data. This section lists some of the known limitations and the user of the report is cautioned to consider these issues before drawing any conclusions from the report.
Lack of Comparable Trades – In many cases there are no comparable trades and in these cases the report simply lists the trade data and shows that there are no comparable trades under “Reported Trade Count”. In other cases there may be only one or two comparable trades. In these cases the report shows the data but it can be a mistake to draw a firm conclusion that the customer price was good or bad based on such a limited sample of data.
Trade Size – The report does not attempt to filter out trades that may be of significantly different sizes than the trade in question. Therefore, the report may be comparing the price of a trade of 10 bonds to a 500 bond trade, or vice versa.
Commission or Fee-Based Trade – The data does not distinguish whether the comparable trades were conducted for commission-based accounts or fee-based accounts. Therefore, the report may be comparing a commission-based trade (with a markup/markdown) for your client with other trades for fee-based accounts (with potentially no markup/markdown).
Market Movement – In the case of municipal bonds the report uses a 10 day comparison range in the market. On a thinly traded bond the report may be comparing the trade you conducted with your customer on one date to other trades done 9 days prior to your trade date. The market may have moved significantly during this time. Also, for corporates that trade to a spread to Treasuries, the report may be comparing a trade done in the morning to a trade done late afternoon on a day when the Treasury markets moved significantly.
Unexplained Reported Trades – Certain trades reported in RTRS and TRACE do not appear to make sense and trade reports submitted to RTRS and TRACE can contain errors. For example, we found one case where a firm bought a particular bond from a customer at a price of 108.20. The only comparable reported trade was a customer buy reported at 115.633. This makes the 108.20 price look very low. After investigation we found that in the 30 days prior to the 108.20 trade there were a total of 15 buys and sells and dealer trades in the same bond. Excluding the customer buy at 115.633, the second highest trade price was 110.907 and this was a sell to a customer. In fact, of the 5 buys from customers during the 30 day period excluding the 115.633 price, the 108.20 trade had the best price. However, because of the one anomalous trade, the report would show that the 108.20 trade was over 7 points off the market. We could find no explanation for the 115.633 trade other than a possible error in reporting by the reporting firm.
Please contact your AAM relationship manager with any questions regarding the report.