TCA customers and providers gain insights from assessing the good with the bad.
Buy-side firms need to embed transaction cost analysis (TCA) into the culture of the trading desk to maximise its effectiveness.
And head traders need to bring balance into TCA discussions with junior traders (i.e. not all bad), just as brokers need to have balanced presentations (not all good) in their TCA presentations.
Those were some high-level takeaways from the Fireside Chat: Applying Advanced Analytics – How Data Analysis Can Help You Execute Trades with Enhanced Accuracy and Speed to Generate Greater Returns, which took place Wednesday morning at Equity Leaders Summit in Miami.
Jesse Forster, Head of Equity Research, Market Structure & Technology at Coalition Greenwich, opened the discussion with data points from his firms’ research on TCA. Namely, 87% of buy-side firms conduct TCA for equity trading; 85% of firms use third-party TCA, 26% use in-house TCA, and 21% use broker-provided TCA.
Just 22% of buy-side firms meaningfully analyze TCA on a daily basis, while 20% do it weekly, 49% do it quarterly, and 9% do it semi-annually.
To the question of why many firms analyze TCA only infrequently, Jason Lenzo, Managing Director, Head of Trading at Russell Investments, said it’s partly a function of some firms still considering TCA as a “tick-the-box exercise.”
“TCA becomes more meaningful if it’s a cultural dialogue on the desk,” Lenzo said. “It becomes important if you can use it as a tool for traders, to show traders what good looks like.
If traders are leaning in and thinking about opportunity cost differently, that will make for a better outcome for the client.”
Lenzo noted TCA can be an effective tool for coaching and mentoring if there is balance between good and bad. “You want people to believe the TCA report isn’t going to be just a negative conversation,” he said. “For the good trades, say this was a really good trade, tell me how you did it. Then you get the rest of the team to pay attention to that.”
For tough conversations, Lenzo suggested starting with the positive. “This is what good looks like – do more of this. You want to develop that culture,” he said. “But then also, this didn’t go well,”
“TCA is an analytics tool that helps you articulate” what traders have done well and what they haven’t done well, Lenzo said.
Forster cited data showing that 17% of buy-side firms say quantified TCA is very important for broker evaluations; 36% said it was important and 30% said somewhat important.
Lenzo said TCA is a function of trade execution, along with prevailing market conditions and the given benchmark. Third-party TCA can always use better data and a more refined peer universe, but having a TCA-led culture on the trading desk is more important.
To the question of how sell-side brokers can better understand buy-side consumption of TCA, Lenzo said some buy-side firms care a great deal about TCA and use it to coach and drive their team and results, but other firms are less focused on TCA. “Opinions and use cases vary.”
Brokers should present a full range of results when discussing TCA. “If you’re walking into a client to talk about outcomes, come in and talk about what’s good and bad, not just what’s good,” Lenzo said. “Have an honest and balanced approach.”
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