Technology-savvy buy-side firms are showing that analysis applied at the time of the trade can help reduce execution costs and move beyond the widely prevalent ‘measure and forget’ attitude, according to a new report from consulting firm Celent.
The study, ‘Transaction Cost Analytics Stuck in Neutral: Accelerating At-Trade Adaptation’, says that while even elementary transaction cost analysis (TCA) has yet to be fully embraced by the whole buy-side community, those firms that have made the leap are now adopting more sophisticated techniques.
“The TCA discipline continues to evolve so that leading-edge buy side firms can more effectively refine their execution strategies,” said David Easthope, senior analyst with Celent’s capital markets group and co-author of the report, in a statement. “Today, those firms that have embraced TCA are moving beyond simple measurement and intermittent evaluation of execution strategy to actually adapting strategies at the point of trade.”
According to Celent, the ‘at-trade’ movement involves some increased use of pre-trade analytics, but also sophisticated new technologies to monitor execution at the point of trade and switch strategies based on a dynamic feedback loop.
The report said that the financial crisis and the advent of high-frequency trading is making real-time adaptation necessary to maintain and improve upon existing execution strategies. It added that the buy-side must evolve to keep pace with the changing market structure, particularly as explicit execution costs fall and implicit execution costs are more closely scrutinised.
Specialised TCA vendors and execution brokerages are offering more tools to meet the buy-side demand, Celent said. While the report argued that some promises of real-time TCA are simply faster data, many brokerages are providing the useful, granular data needed for the new methodologies. Other firms are going further, providing specific tools to monitor performance during the execution phase.
Traders are also being allowed to input smarter parameters to automate the monitoring and switching of execution strategies based on these parameters for stocks during the trading day.
“While at-trade developments are pushing TCA forward generally, some specific areas will be key drivers of this at-trade evolution, namely intra-day algorithm performance measurement and predictive switching,” says Mayiz Habbal, senior vice president of Celent’s securities and investments practice and co-author of the report.