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According to a new industry study released today by TABB Group, “Imperfect Knowledge: International Perspectives on Transaction Cost Analysis,” equity post-trade transaction cost analysis (TCA) usage among U.S. and European firms will reach nearly 90% by 2009, with 38% of those firms examining TCA on a daily basis. Nearly two-thirds of US and European equity firms now spend over $100,000 a year on TCA and larger firms, when including internal development costs, now spend annually on average $200,000.
Moving outside the cash equities marketplace, TABB Group, the New York- and London-based capital markets research and consulting firm, says 58% of US buy-side FX traders have already attempted to measure execution quality and transaction costs. Similarly, 25% of equity options traders now use an internal model to track their execution quality and transaction costs.
Across US and Europe, TCA deployment is closing quickly in on ubiquity, explains Adam Sussman, TABB Group’s director of research and the study’s author based in New York. “Its usage is far more widespread than other oft-cited components of modern day trading like algorithms, execution management systems and crossing networks because the desire to measure performance cuts across nearly all trading styles, investment strategies, geographies and even asset classes. Today, it really doesn’t matter if you’re a trillion-dollar, quantitative mega-manager or a classic, bottoms-up stock picker with $50 billion in assets. Both scrutinize their post-trade TCA at least once a week.”
Sussman also points out that “the desire to measure is no longer a trend but a full-blown staple of asset management – and the story’s only just begun.”
0While regulation and transparency are the keys to enabling more precise execution measurement, Sussman says, the benefits of TCA are still contested. Nearly a quarter of those interviewed see volatility as the main driver of unavoidable transaction cost, while others cite order size and a stock’s liquidity. The question is no longer whether there should be TCA on the trading desk, but how it is incorporated into the process.
Addressing Europe’s markets, he adds, “The small number of traders still free from TCA’s impact is dwindling as MiFID exerts its influence. However, at the same time as usage spikes, we expect European TCA will become more accurate as reporting requirements force more trade information into the public domain. But the changes in how execution quality is measured hardly ends there, with the entire European market microstructure about to undergo a sea change as new execution venues threaten to fragment liquidity and introduce new business models requiring traders to revisit trading strategies and costs.”
Other key findings include:- Nearly 75% of firms evaluate traders against TCA, while others believe measuring individual traders is “a slippery slope to a mercenary environment that discourages teamwork.”
- Nearly 25% of equity trading firms believe TCA should be used as part of compensation for traders. Among firms already using TCA-based compensation, up to 20% of bonuses are based on TCA; nearly 80% are opposed to the idea.
- 37% of US equity traders attribute decreasing transaction costs to better tools and market data.
- Regulatory interest is increasing concerning equity options with the SEC announcing recently a program to pursue quarterly execution reporting similar to what occurs in equity markets.
The TABB Group study focuses on how the buy-side views post-trade and pre-trade TCA, including how frequently it is reviewed, the different benchmarks traders are measured against it, how that affects their compensation and impact on portfolio management. It also examines how usage patterns differ in the US compared to different regions of Europe, as well as the viability of TCA in the FX market and other asset classes. TABB Group conducted lengthy interviews with 137 buy-side traders, with a slight edge to US equity traders, and 22 FX professionals across different organizations, including investment banks, hedge funds and traditional asset managers.
The study can be downloaded by TABB Group Research Alliance clients and all pre-qualified media at https://www.tabbgroup.com/Login.aspx. To request an executive summary or to buy the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com .
