(November 4, 2012) – Ex-State Street transition management veteran Ross McLellan has published a whitepaper decrying the lack of change in the industry.
“In 1997 you could have bought [Apple] for $3.28 per share after they rehired their former CEO Steve Jobs,” McLellan writes in A New Approach to Transition Bidding. “Gas cost $1.22 per gallon. After 79 years of futility, Boston Red Sox fans wondered if the cause was worth it and the state of Illinois swore in a new first-term state senator, Barack Obama. Fast-forward to today and the world has changed dramatically. However, transition managers often provide, and are often asked to provide, the same template as they did fifteen years ago.”
This template, McLellan argues, fails to reflect large changes in execution venues, among other things. “While it would be overkill for a transition manager to properly account for all order routing prior to the start of the transition, it is extremely important to find out where transition managers are accessing liquidity from,” he writes.
As part of the solution, McLellan—who recently founded Harbor Analytics, which aims to consult with asset owners on transaction costs—argues that the industry “needs a bidding platform where differentiated trading practices are evaluated, providers have the ability to demonstrate their cost minimization strategies, and all information is verified by a third-party.” He also believes that third parties should conduct post-trade audits, and that liquidity sources should be outlined in a more robust manner.
McLellan also calls for changes in the way costs are accounted for, noting that internal and external crossings are assumed to be free from implicit costs, which is not always accurate. “It is also our belief that transition managers should not be stuck with assuming the costs calculated by any one pre-trade model and retain the ability to allocate the expected cost by execution method,” he writes. “Transition managers should be provided an overview of the portfolio, with expected cost as calculated by a transparent model where all parties understand the inputs and let that manager estimate the cost based on their trading practices. Certain transition managers may employ different trading strategies that ultimately reduce costs.”
McLellan’s call for change—of which he is not alone in voicing—comes at a time of contention in the transition management business. The recent turmoil in this industry is well known, and started, by and large, when McLellan’s departure from State Street was revealed.