How far can the buy-side rely on broker TCA?

Can buy-side traders tell if they are really receiving best execution on the back of the data they receive from their executing brokers?
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Can buy-side traders tell if they are really receiving best execution on the back of the data they receive from their executing brokers? Since MiFID increased the pressure on the sell-side to prove the value of their trade execution services to clients, traders have erred on the side of caution when analysing the data being fed to them.

“I view broker transaction cost analysis (TCA) with a degree of scepticism,” Jason McAleer, head trader, Newton Investment Management, told “In this post-MiFID environment, brokers need to prove best execution and their post-trade TCA products can act as a box-ticking exercise for this.”

Richard Semark, managing director, client execution, UBS, agrees that there are potential conflicts of interest, particularly when using a single broker to compare the execution quality of other brokers, but notes, “We provide analysis, both intra-trade and post-trade, on client flow through UBS and are very transparent with the data we provide. We are confident that if clients compare this against other independent data providers it will match up.”

Brian Schwieger, director of EMEA execution services, head of algorithmic execution, Merrill Lynch, adds: “The buy-side is very interested in understanding our methodologies to better interpret our analysis, but we’ve had no enquiries relating to the integrity of our analysis.”

MiFID posed new challenges for TCA providers primarily because of the liquidity fragmentation it has unleashed. As well as retrospective benchmark analysis of their executions, buy-side traders now want to be able to monitor and assess how their orders are traded across different liquidity venues.

“This need matches the general trend of increased usage of liquidity-seeking algorithms where the most important decision you make is how to capture liquidity,” comments Mark Goodman, managing director, Direct Execution (equities), UBS. “Whereas five years ago liquidity was sticky, nowadays volumes shift between venues throughout the day. TCA has to evolve to reflect this.”

McAleer says part of the challenge lies in the fact that data on comparative outcomes is inherently problematic. “I don’t think many brokers provide information on what would have happened if they executed elsewhere as it could undermine their goal of providing best execution,” he says. “It’s all very subjective.”

To get a better idea of execution performance, correlate long-term trends and evidence best execution to end-clients, McAleer says that Newton feeds its own data through ITG’s TCA product for independent analysis. In an ideal world, says McAleer, Newton would be able to conduct its own internal analysis on every trade executed with each of its broker counterparties, with all transaction data centralised in a single system.

“This would require resources and a technology platform we haven’t got,” he says.

Schwieger says that Merrill Lynch has adapted to the new environment by adding more analysis and interpretation as part of the TCA it provides clients.

“With fragmented markets, buy-side firms are now inundated with data,” he says. “Now, more than ever, we are analysing this data on behalf of the buy-side and highlighting the trends we see to provide them with feedback and guidance on alternative strategies.”

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