Can the use of TCA in fixed income mirror equities?

Recent Coalition Greenwich survey found that 84% of respondents are already using, or open to adopting, transaction cost analysis (TCA) in their fixed income portfolios.

Despite hurdles around culture and access to technology, transaction cost analysis (TCA) is set to become widespread in the fixed income markets, a panel hosted by Coalition Greenwich has predicted.

When it comes to TCA in fixed income, the expert panellists were clear that it is on the rise, despite being a comparatively harder task to implement than in the equities space, with decisive hurdles to overcome on the road to adoption.

Key to the use of TCA is access to reliable data.  Panellists recognised that while in equities the consolidated tape (CT) directly informs the TCA, in fixed income many other factors must be weighed.

While the US uses trade reporting and compliance engine (TRACE) for US Treasury securities introduced back in 2002 – Europe is yet to implement a consolidated tape for fixed income.

According to figures from the 2022 Coalition Greenwich market structure and trading technology survey, 50% of surveyed participants responded that their fixed income trading desks currently perform TCA, while a further 15% confirmed their intention to do so.

Ravi Sawhney, global head of trade automation and analytics at Bloomberg, emphasised that these numbers were a positive indicator that the market recognises the value of transaction cost analysis in the fixed income space.

The same survey found that 16% of market respondents do not believe that there is a need for TCA, whilst the remaining 19% highlighted that they did not perform TCA only because they lacked the tools and data to do so. 

Speaking to this point, panellists acknowledged some of the key reasons for this hesitance from respondents. Ross Walter, head of fixed income TCA and execution consulting at Vanguard, reinforced that fixed income is not as clearly defined as the equities space, where the is a cohesive CT which allows for clearer research. Some firms are choosing to wait for the data and technology to become less murky and solidify further before diving in, he explained.

Furthermore, the “very well-defined limits” of some asset classes – even within fixed income – was highlighted as a key hurdle, with the focus set on TCA in treasuries and credit for now.

Adding to this, from a credit trader perspective, Tom Melvin, director of North American credit trading at Invesco, explained that the culture and established ways of working were another key factor and possible barrier to adoption. He asserted that adopting new functionalities and tools can often be a longer process in the space, especially as the market evolves at a significant speed. “Breaking down old habits” is not an easy task in execution processes.

The Coalition Greenwich survey also covered what the market believed to be the most important features for TCA used on trading desks. The top factor was found to be “as both a pre- and post-trade tool to model/forecast trades and to analyse trader/trading efficiency and effectiveness,” closely followed by “as a post-trade review practice to analyse trader/trade effectiveness again benchmark/s”.

Read more: Joe Collery: A TCA wish list for the buy-side

Melvin highlighted that pre-trade data had increased exponentially over the last five years with access having become easier in recent times.

In terms of the sources and metrics being employed in order to understand the theoretical cost of a trade and accounting for arising challenges the panellists explained that there are a multitude of approaches. Sawhney explained that the integration of clients’ data into any TCA engine is a “big lift,” with a direct correlation between the quality put in and the quality of the output.

He confirmed that Bloomberg has recently made strides in this area, and that while the equities pre trade model has been in use for some time, Bloomberg has now also developed a product for the fixed income space.

Speaking to The TRADE earlier this year, Joe Collery, head of trading at Comgest, highlighted the importance of the pre-trade element in the TCA space, explaining that “it removes the need for blotter scraping that take information from you and optimises the information already available out there. It would increase market activity during the day and shift a portion of the liquidity currently seen at the Close.”