Poor data quality poses a critical or significant challenge to transaction cost analysis (TCA) processes for more than three quarters (77%) of derivatives-focused executives at asset management firms, according to a recent report from Acuiti; but equities are broadly untouched by the issue.
This will not come as a surprise to many. “TCA is most mature and widely used in equities, where data availability and standardisation are the most advanced,” the study, The Growing Sophistication of Transaction Cost Analysis’, affirmed. Participant responses confirmed this, stating that equities are the easiest asset class to evaluate TCA in; the most difficult, they said, are OTC fixed income derivatives, spot fixed income and equity derivatives.
Changing regulatory requirements around best execution, technological developments and a widening range of use cases have prompted many asset managers to use the tool in asset classes beyond equities, Acuiti found – most commonly fixed income and equity derivatives, although participants also apply the strategy to commodities and listed and OTC fixed income derivatives.
The issue of poor data quality is most acute among those measuring TCA in OTC derivatives, the report noted, while those who only deployed TCA for equities were far more likely to rate it as providing no, or a slight, challenge.
“Fixed income analysis is more complex due to the diversity of instruments and the absence of a centralised marketplace,” the report explained. “In addition, measuring TCA in less liquid markets can be challenging.”
OTC markets pose difficulties due to their opacity, it continued, with less inputs to measure performance against. Additionally, the customisable nature of swaps contracts and the popularity of privately negotiated deals with limited competition make it difficult to compare execution quality and pricing.
Fragmented data analysis contributed to the problem of poor data quality, Acuiti said, observing that just half of the firms participating in the study used a single, golden source of data for processes including TCA and risk and portfolio modelling.
“As firms look to integrate TCA processes in other areas of the business, fragmented data across the organisation will set back drives for efficiency,” the company warned.
In addition to poor data quality, the study found that more than 70% of participants found sourcing accurate data to be a critical or significant challenge when conducting TCA. Measuring liquidity was the second most challenging issue cited, while allocating fixed internal costs was the most popular choice marked as ‘no challenge’ or ‘slight challenge’.
Bringing together different data sets was a significantly less challenging process than sourcing the data itself, with no participants labelling this as a significant challenge and the majority calling it a slight challenge. More than 20% stated that it was no challenge at all when conducting TCA.
Looking ahead, Acuiti predicted that firms will lean into outsourcing TCA processes. “As the sophistication of TCA increases, so too does the cost of development,” it said. “Firms that are deploying TCA pre-trade and looking for real-time TCA will ultimately be better served mutualising the costs of developing that software with a third-party vendor.”
©Markets Media Europe 2024
