Pressure from clients and a need to provide cost transparency are the main drivers behind uptake and enhancement of transaction cost analysis (TCA) capabilities, according to research by consultancy GreySpark.
A survey of over 60 buy-side- and sell-side institutions, technology firms and trading venues found 85% see pressure from clients as the main driver behind expanding their TCA.
Though much has been made recently of the impact of high-frequency trading on trading costs, just 27% identified this as motivation to improve TCA capabilities and the same proportion saw TCA as necessary to restore trust in buy- and sell-side relationships.
According to GreySpark, buy-side firms are being asked by their clients to justify the risks involved in their strategies, while their senior executives are also concerned about the cost of trading and its impact on profitability. Pressure from clients was particularly important for the buy-side, with 100% of respondents citing it as a key driver in their TCA strategy.
The research also identified several upcoming trends that are likely to dictate the development of TCA products in the coming years and indicate where firms will look to direct their TCA spend.
Expansion of TCA beyond equities has been developing for quite some time, and GreySpark’s research found that, while use of equity TCA is unlikely to grow over the next few years, fixed income, listed derivatives and FX TCA will all see a significant expansion in uptake over the next three years. FX TCA is likely to be in strong demand, as less than 20% of firms currently use it but over 60% expect to be utilising TCA for FX trades by 2017.
Furthermore, all buy- and sell-side respondents said they are planning to use pre-trade TCA by 2017 in order to develop optimal trading strategies. Real-time TCA is expected to see usage grow by around 69% over the same period, in part driven by a greater number of vendors bringing this technology to market.
However, , buy-side respondents did not feel that TCA facilities were a significant consideration when choosing brokers. This could in part be driven by the improved quality of third-party TCA tools, as no institutional investors in the survey said they were reliant on broker-provided TCA tools.