Buy-siders are becoming increasingly reliant on transaction cost analysis (TCA) as a key tool for performance optimisation and increased returns, a new Coalition Greenwich study has found.
According to the report, around 85% of buy-side equity traders highlighted it as an important part of broker evaluation.
Moreover, third-party TCA systems are the most popular choice when it comes to selecting a TCA platform, with 88% of buy-side traders citing this as a preference, underlining the convenience, cost-effectiveness and scalability benefits this solution offers.
The report also pointed towards the ability of third-party platforms to capture data across a wide range of asset managers as a driving factor behind the platforms’ popularity, citing the ability to conduct peer analyses and gain an unbiased view of trading performance as important aspects of these systems.
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In comparison, broker-provided platforms are only used by 33% of the respondents, while only 18% of buy-side firms choose to build their own in-house TCA system.
Similarly, established firms such as Virtu Technology Solutions and Bloomberg appeared to be the frontrunners for TCA platforms, further indicating that buy-siders prefer to remain loyal to trusted vendors, as also seen in a recent Coalition Greenwich report on order and execution management systems (OMS/EMS).
Speaking to The TRADE, Jesse Forster, head of equity market structure and technology at Crisil Coalition Greenwich, said: “TCA has become vital because the buy-side has been forced to quantify their trading data more than ever. Their trading, and therefore trade analyses, is growing increasingly complex. Like everyone else, they’re doing more with less and need to automate everything they possibly can. They need signals, not noise, and quantified TCA provides a great foundation.”
What matters most?
When it comes to the most important features of analytics platforms, post-trade analysis prevails, with 90% selecting it as the most vital characteristic.
Despite this, compliance and supervisory oversight are still important factors, with 53% of traders alluding to the importance of reporting and trade surveillance when it comes to TCA.
Additionally, pre-trade modelling is still considered an essential feature by 38% of traders, despite less widespread adoption and perceptions around pre-trade models being a means of justifying trading decisions.
The report also underlined customer service, customisation and flexibility as important aspects traders should look for in their solutions and also emphasised that traders should take heed of the ongoing process of TCA, which requires consistent monitoring, analysis and optimisation if they wish to achieve growth and further insights in this area.
Taking this into account, the overarching industry opinion appears to be that TCA has become a vital tool for firms to be able to gain a competitive edge, enhance trading strategy optimisation and provide better investor returns.
To collate the report, Coalition Greenwich interviewed 40 buy-side equity traders in North America from July to September 2024.