While football is game of inches, trading is a game of microseconds. And those microseconds, or even nanoseconds, can be the key to maximizing alpha.

So how does a trader do this? And how do firms help the buy side trader make that big score?

Matt Celebuski, CEO at Trade Informatics sat down with Traders Magazine and discussed how the creation of an investment or “alpha” profile for manager can be used to help tailor execution strategies. After all, best execution is the name of the trading game.

Would you like to be part of this series? Email me at jdantona@marketsmedia.com

“As a global innovator of trade analytics and customized systematics trading tools, we’re often asked to rank brokers or algorithms by performance but are often hesitant to do so without further qualification,” Celebuski began. “ It’s like being asked who’s faster—the world’s fastest sprinter or the world’s fastest marathoner. Of course, in the case of a foot race, the definition of ‘fastest’ depends on the distance.  Likewise, in the case of algorithm or broker rankings, the definition of ‘performance’ depends on the duration of the alpha.”

Now Celebuski doesn’t mean alpha in the strictly ‘abnormal return’ sense. Rather, he means alpha as shorthand for the investment fingerprint unique to any strategy or manager. This investment fingerprint, which Trade Informatics calls an ‘alpha profile,’ is different from manager to manager and can vary across a number of dimensions, the most important of which, in our view, is the rate at which return begins to accrue to the portfolio.

“Managers with better market timing abilities have a different alpha profile than managers with poor market timing abilities,” he continued. ”Value managers look different from growth managers, and hedged ideas (pairs and the like) look different from long-only or short-only ideas. What’s more, not every good market timer is correct in the moment.  Perhaps a good market timer is correct within a week of implementation, but they’re not correct within a day or two.”

It’s Celebuski’s belief that a manager’s alpha profile should be used to create custom execution strategies.

“Historically though, post trade analysis and algo development services have been provided by two different firms. That’s like going to a cardiologist for a stress test and then turning to your podiatrist to prescribe a treatment.,” he said. “They may both be exceptional doctors, but a podiatrist is not qualified to prescribe treatment for a cardiovascular patient, especially without intimate knowledge of the patient’s diagnosis and medical history. This approach is unlikely to provide benefit, and may in fact prove damaging to the condition of the patient.”

The same analogy goes for trading. This is the case with traditional execution shops and their broker sponsored algos versus TCA services. Celebuski finds it far more effective to have a single service provider both to diagnose (alpha profile) and prescribe (implementation).

“By tying order source to execution strategy, managers assume less implementation risk and are able to resume the process of portfolio construction reducing the likelihood of experiencing a gap between expected and realized returns,” he said.