Over the past few years, transaction cost analysis has grown from a routine, standard exercise to a meaningful assessment of trading performance, according to the panellists discussing optimising TCA strategies from the basic best execution analysis to true insight-generating analytics.
Victoria Bryan, senior data analyst, capital markets at Northern Trust notes that TCA has evolved from number crunching analysis into offering actionable insights that traders can use to enhance their performance going forward.
“An example of an insight would be “this is where you did well and not so well as well as pieces of feedback that can help you improve,” she adds. “People care about different parts of the trade. For example, some clients will want to look at portfolio timing while others are more interested in the indiivdual trading desk or traders’ behaviour. The most important thing is to understand what insights you think are important.”
One reason for the much more granular and holistic approach is that buy side firms are under greater regulatory pressure to deliver best execution but also competition has intensified as margins have dropped.
“The buy side is getting more and more sophisticated even in the last five years,” says Michael Richter, executive director, transaction cost analysis, S&P Global Market Intelligence. “The thirst for data has never been higher but it all comes down to how the buy side is using TCA. At its most powerful it tells a clear story as to whether expectations and the goals of the trade were met, If they didn’t they want to look at facts that influence it. I think deciding on what you want to achieve is the best way to use TCA data.”
While the technology is important, the human element should not be underestimated, “It is not just about taking the best in class people but those who can communicate the information,” says Bryan. “They need to understand the trading desk and educate them on the best way to read the data. For example, VWAP may be your target and you may hit it but was it a good choice?”
TCA is also increasingly being used to strengthen the bonds between the different parts of the trading lifecycle. “There is now much more dialogue between portfolio managers and traders,” says Adrian Bradshaw, senior equity dealer at Invesco. He notes the firm is now giving the information to its internal asset managers because they want to gain a better understanding of the performance or the trading desk.
©Markets Media Europe 2023
