Buy-side clients are seeking greater neutrality in transaction costs analysis (TCA) in order to gain a wider view of their execution performance, according to Jefferies’ global head of electronic and program trading, Bill Bell.
Jefferies has recently opted to offer its clients TCA via data and technology provider Markit, instead of developing capabilities in-house.
"It can cost multiple millions of dollars to develop a TCA platform, and we would rather focus on the core area where Jefferies really excels, which is providing top-tier algorithms that can enhance execution performance," Bell told theTRADEnews.com.
The brokerage said the deal with Markit not only enables it to focus on core competencies but also to provide clients with a more robust TCA solution.
Bell said broker-developed TCA can have a number of drawbacks for clients.
"TCA provided in-house by brokers is often used as a sales pitch and rarely gives indications of execution underperformance. Also, if clients want to compare brokers using their TCA data, it can be like comparing apples and oranges," he said.
A lack of standards in TCA means that brokers often provide different datasets that cannot be easily matched up. To help buy-siders make sense of TCA data from myriad providers, some third-party firms offer services to aggregate data together to enable institutional investors to compare execution performance across their broker relationships.
Bell added that, by using Markit TCA, clients will benefit from greater transparency.
"Clients want their brokers to be more transparent which is why we're taking a neutral approach to TCA and using Markit's platform, which gives clients the data they really need to help them with their execution. They're not a competitor of ours and they have no conflicts of interest with our clients," he explained.
More outsourcing to come
The trend towards outsourcing TCA to third parties is likely to continue, according to Emannuel Doe, president of Interactive Data’s Trading Solutions business.
"TCA used to be a differentiating factor for the sell-side but today it's something everyone offers and no longer gives them any competitive advantage. We're starting to see more of them look at outsourcing," he said.
While today most brokers offering their own TCA solution, Interactive Data expects that they may not update their existing systems as the cost of keeping up with the latest TCA technology, which is increasingly moving to real-time systems, is prohibitively high and falls outside of core business lines.
Additionally, there are many new entrants in the TCA business, particularly market surveillance specialists like SMARTS and Ancoa, which are looking at ways to utilise their real-time market alert systems to provide institutional investors with additional information to inform trading decisions.
On top of this, the inherent conflict of interest of having a broker to provide an assessment of the execution performance they offer their clients is something more buy-siders will be looking to address.
"Comparing one broker to another is absolutely critical for the buy-side to get the most out of their TCA," explained Doe.
"The buy-side is starting to drift away from brokers' in-house TCA because they need independent verification from firms that have no skin-in-the-game and can give a comprehensive cross-broker view of their execution performance."