The results of a study into predicting trade characteristics that could be used for compliance with the best execution rules of the Markets in Financial Instruments Directive have been published by London consultancy Z/Yen.

The study, supported by Sun Microsystems and the London Stock Exchange, with the cooperation of four brokers, was based on a formal test of Z/Yen’s PropheZy analytics software using three months of 2004 data comprising over 190,000 trades with a value of over £54 billion in order to predict a fourth month. The project objective was to see if PropheZy could predict a number of characteristics, particularly the likely price range of a trade.

Other characteristics that were tested for predictability included the counterparty to the trade and the share itself

Using the predictions, it was possible to set a level for best execution using price band prediction differences, resulting in a subset of anomalous trades for investigation.

The project team developed a prototype ‘compliance workstation’ combining a number of tools to display the results visually, and provide a ‘drill down’ tool to track the investigation process, providing an audit trail of compliance officers’ work.