way to complete the trade that has the highest probability of achieving the bestresult. Surely, this meets the definition of best execution, whatever the outcome.But we have a problem. How do we know that the trader is conscientious andcompetent? How does the trader know? We need some standards by which to judge. It’s not good enough for CIO’s and Compliance Officers to accept thetrader’s own statement that he is a good trader. Portfolio managers, who liveunder the performance gun every day, would have little tolerance for such anassertion.
What makes for a good measure?
An optimal implementation strategy requires coordination of portfolio manager,trader, and broker roles. Thus any incentive policy must [a] align these disparateinterests and [b] deal effectively with the fact that the responsibility for goodtrading performance is shared by manager, trader and broker.We can identify three characteristics that would be desirable in any measureused to determine trader compensation:
Most importantly, the measure most correlate highly with the primaryobjective of delivering superior performance to clients.
The measure must not be gamable. A clever trader should not be able totrade in a manner that produces superior scores without satisfying the primaryperformance objective. Nor should the evaluated person be able to alter or edit trading data records without supervision.
The measure must create a level playing field for all traders measured.Differences in external factors affecting trader performance, such as softdollar requirements, constraints placed by the portfolio manager, level of discretion available, work load, pairs trading, and many other complicatingfactors, may influence trading style, flexibility and recorded quality.We will return to the initial requirements shortly, but let us first point out theimplausibility of accounting for “all factors.” Three forces interplay:  theinability of the human mind to grasp any more than a few dimensions of complexity;  external constraints that affect the outcomes; and  theimpossibility of categorizing and recording all the information necessary toaccurately portray and contextualize every trading situation.
The typical trader’s primary lament about quantitative evaluation is that itoversimplifies the complexity of the task at hand. “What I do is more an artthan a science.” The trader’s world is assuredly complex and fraught withrandomness, uncertainty and downright deceit. Thus the trader cannot