Transaction cost analysis (TCA) is on the brink of becoming a credible tool for improving trade performance, after years of being regarded by sceptics as a box-ticking exercise, according to US research consultancy Greenwich Associates.
In the firm's annual study of institutional investment in the US equity market, 35% of institutions said their compliance departments used TCA systems to ensure best execution, with 40% employing TCA to assess broker performance on internal trading desks, 38% to identify outlier or problem trades and 37% to measure active trading results against a benchmark.
“If that trend carries over to other markets around the world, 2011 could emerge as something of a watershed moment in the development of TCA – the point at which institutions started viewing these systems as something more than ”check-the-box' compliance tools,” said Jennifer Litwin, director of institutional marketing. Greenwich's 2010 US benchmark survey cited compliance and identification of outliers as the key uses of TCA among US institutional investors.
Use of TCA varies according to asset class and investment style, noted Greenwich. While 70% of active equity investors employ TCA in their investment process, only about a quarter of participating institutions use TCA in fixed income; a similar proportion employ TCA in FX. According to Greenwich, 56% of TCA users have contracted the services of ITG/Plexus, while 20% use Abel Noser and about 15% use Bloomberg.
A separate study published by Greenwich Associates in 2010 found that 40% of institutional investors did not consider TCA a credible means of demonstrating trading performance. Only one in five of traders at the 114 buy-side firms interviewed considered the accuracy, richness and depth of their core trading data to be consistently adequate.
In April this year, brokers Bank of America Merrill Lynch, Citi, Nomura and UBS attempted to address concerns over the consistency of TCA in a consultation document, ‘Transparency and Standards in the Provision of Transaction Cost Analysis', issued in association with technology provider and TCA system vendor TradingScreen.