Asset managers are increasingly using Transaction Cost Analysis (TCA) to drive insights beyond traditional uses as well as expanding the scope of asset classes covered, a report from Acuiti has found.
TCA is a crucial tool for asset managers that has risen in importance as costs have escalated, regulatory requirements have been imposed and increased competition has put a spotlight on execution efficiency.
In order to better understand how asset managers are adapting their approaches to TCA, Acuiti partnered with Abel Noser Solutions, a Trading Technologies (TT) company, to conduct a study into how firms are evolving their strategies. The whitepaper, The Growing Sophistication of Transaction Cost Analysis, is based on a survey of senior executives at 64 asset management firms across the global market, released prior to TT’s second annual TT Connect event in London on Thursday: Unlocking Profit with Data & Analytics.
Over the past decade, approaches to TCA have evolved from a simple measurement focused on basic metrics such as commissions and spreads to a holistic view across multiple metrics, including market impact and a broader range of inputs.
The study found that 65% of respondents to the survey had increased the sophistication of their analysis of TCA data over the past five years.
Use cases for TCA among asset managers have proliferated in recent years with applications now including risk management, alpha creation and marketing to investors in addition to more traditional use cases, such as internal compliance and decision making on broker selection.
Asset managers are also taking a more sophisticated approach to how TCA is embedded within their workflows. This is, however, an ongoing process for firms. For example, while 87% of respondents recognised the importance of integrating TCA into their OMS/EMS, less than half currently had that functionality.
Challenges still remain for firms, with 94% reporting that poor data quality hampered their ability to effectively measure TCA. Other major challenges firms faced were seen most in measuring liquidity and establishing the market impact of a trade.
As the use cases of TCA increase with the advance of technology solutions to measure and analyse the data, so too do the asset classes that are in scope for TCA. TCA is most mature and widely used in equities, where data availability and standardisation are the most advanced.
However, this survey found that asset managers are increasingly deploying TCA in other asset classes outside equities.
Asset managers taking part in the study said they commonly applied TCA to fixed income and equity derivatives. Less commonly, respondents also applied TCA to commodities and listed and OTC fixed income derivatives.
Peter Weiler, TT’s EVP Managing Director, Data & Analytics, said: “The findings in the study correlate with our own experience at Abel Noser and TT in which asset managers and other clients are looking to increase the applications of TCA across both asset classes and the trade lifecycle. This is evidenced in part by the demand for our new listed derivatives solution, TT Futures TCA, which was released in June.”
“Over the past decade, TCA has gone from a retrospective, compliance-focused process to one in which valuable insights can be driven across the trade workflow,” says Ross Lancaster, Head of Research at Acuiti.
“As firms find more use cases for TCA, the need for high quality, real-time data also increases, which is causing challenges for some firms. However, for the firms that can achieve data quality across asset classes, there is significant value to be gained both in terms of trade optimisation as well as in alpha generation.”
Download full report here: https://www.acuiti.io/the_growing_sophistication_of_tca/
Taking place on the afternoon of 12 September at the Andaz London Liverpool Street, TT Connect: Unlocking Profit with Data & Analytics is aimed at helping senior-level leaders from the international trading community discover how trends in artificial intelligence (AI), compliance, regulatory technology, data and consolidation will impact the capital markets. The event featuring a roster of expert speakers and panelists is open to members of sell-side and buy-side firms with complimentary registration.
