Message standards body FIX Trading Community is working to standardise transaction cost analysis (TCA), while optimising its messaging for high-frequency trading (HFT).
FIX’s TCA Working Group has released guidelines for TCA in equities to help market participants to determine the cost of trading at any or all points in the investment cycle.
Buy-side firms have long sought clarity on TCA, as the absence of standards is believed to undermine firms’ ability to assess execution performance objectively. Curently, there are multiple methodologies and terminologies in practice, which could produce contradictory results and make it difficult to understand what happens post-trade.
“The buy-side would like a clear and unbiased set of guidelines that will help them to measure their capabilities,” Tim Healy, global marketing and communications manager for FIX Trading Community, said. “Our guidelines are looking to remove some of the mystery and lack of conformity in the space.”
FIX has polled members, which compromises buy-side, sell-side and vendors, to determine specific problems with TCA. Issues raised included inconsistent and lack of clarity around condition codes; the need for additional timestamps and instruction tags; and limited consensus on relevance of TCA practices to other asset classes.
According to FIX, two of the most important items identified were the need to create a glossary of industry-acceptable TCA terminology and to define a standardised set of best practices.
Michael Napper, co-chair of FIX’s TCA Working Group and director and head of global client analytics technology at Credit Suisse, said while the current focus has been on glossary terms, FIX has also provided TCA perspectives based on market structure and industry segment.
“We have also taken the approach to recommend best practices where feasible while recognising some issues may never easily be standardised. Going forward, we will investigate the possibility of enhancing the FIX specification to facilitate the TCA data collection process.”
Raising awareness
OpenTCA, a former consortium of large brokers, including Citi, Nomura, UBS and Bank of America Merrill Lynch, buy-side institutions and execution management systems provider TradingScreen, has also tackled TCA standardisation in the past, with little success.
Robert Kay, the former head of analytics at TradingScreen, who worked on OpenTCA, said it was hard to raise TCA standardisation awareness. “It’s not the most important thing that market participants have to worry about today and it’s a complicated subject.”
He said providing a glossary of terminology and best practices was a good starting point, however. The process becomes more complex when trying to set standards for how TCA is calculated. “There are a lot of opinions on how things should be calculated and for us it was very difficult to get a consensus,” said Kay.
Healy said FIX planned to spread awareness at its two major conferences in New York and London. “We will look to encourage the community to review the guidelines.
“We are pleased with the feedback we have received so far and there seems to be real appetite for the market to learn more about this initiative.”
The FIX project is initially focusing on equities, but the standards body hopes the benefits will eventually expand to cover futures and options, FX and fixed income sectors.
“The move in the OTC derivatives trading space towards electronic trading will enable the buy-side and TCA providers to have access trade logs which can then be used to provide clearer insight into trading activity,” Healy said. “The FIX messaging system will be used by the vast majority of swap execution facilities that are currently live.”
Leaner and faster
FIX is also optimising the protocol for low latency, which will include support for HFT by using binary compression to make FIX messages smaller, enabling to be sent in quickly.
FIX’ High Performance Working Group carried out a review on the protocol and as a result there are three new binary encodings.
“The three new binary encodings will produce fast and compact encodings of messages,” Healy said. “The benefits of this initiative will be felt by all participants who require low latency and high performance access to venues, in particular the exchanges and MTFs.”
FIX has previously launched FAST protocol to support high-throughput, low latency data communications between financial institutions.