Buy-side trading heads scorn use of transaction cost analysis for fixed income

AXA's Lee Sanders and Pictet's Carl James reject use of TCA in fixed income markets due to nature of products compared to equities.

Two buy-side trading desk heads have firmly rejected the use of transaction cost analysis (TCA) for fixed income during a panel at this year’s Fixed Income Leaders Summit US in Philadelphia.

While the use of TCA within the equities and foreign exchange markets has seen significant upticks in recent years, two heads of trading for buy-side firms outlined why they believed it was an unsuitable tool for fixed income trading during an Oxford-style debate panel.

“I am driven by one thing and one thing only, and that is the best outcome for our clients,” said Lee Sanders, head of execution FX and UK & Asia fixed income trading at AXA Investment Managers. “How we measure that and prove that we are doing that doesn’t necessarily resonate with TCA. This is about performance, not cost analysis.”

The nature of fixed income products means that a methodology that was designed for equities is unfit to properly measure the outcome of a trade, agreed Carl James, global head of trading at Pictet Asset Management, who pointed out that there is no regulatory obligation currently at work for firms to adopt TCA from a compliance perspective.

“For me the key element is that they are a number of different instruments, whereas equities is a single instrument,” said James. “Fixed income is traded in various different ways, so it is about the process. Price is important but it’s the process of how you get to that price that is really important… My own personal view is that in the equities space they have taken TCA and hung it around their necks like an albatross. For me, it is about process. Let’s stop saying TCA, let’s call it best execution analysis or performance analysis.”

Defending the use of TCA for fixed income, Vidya Guruju, product manager, fixed income trading at Charles River, said that while there was “no perfect solution”, pricing in fixed income will eventually improve and TCA provided sufficient intelligence on how firms can improve their process.

Meanwhile, Alex Budny, global head of trade analytics at State Street Global Advisors, pointed out that different firms will have different interpretations of TCA and that the changing marketplace meant that the application of trade data would provide opportunities to learn about each firm’s objectives.

“We start with making sure that we can digitise the trading workflow; we want to make sure how that order comes to the desk, the urgency, that information, that data… that is something that disappears a lot into the ether but should be in the record of that trade and how it is analysed,” Budny said.

However, AXA’s Sanders rebutted that fixed income trading should not be wholly driven by data and that the focus should always remain on consistently delivering for clients in line with best execution objectives.