While most buy-side traders would agree on the importance of achieving best execution, there appears to be no consensus on how best to monitor execution performance. When theTRADEnews.com readers were asked last month to identify the most important source of execution performance information to the buy-side, internal sources and traditional transaction cost analysis (TCA) providers were cited by 35% of respondents, with brokers receiving 30% of votes.
The poll result suggests that buy-side institutions need to combine data from a variety of sources to conduct the various real-time and historical analyses required to measure performance across multiple counterparties and venues.
“Most bulge-bracket and mid-tier firms can quickly provide meaningful statistics that show how effectively they themselves have performed against different benchmarks, but our approach has been as an aggregator of analysis data with the ability to normalise this information, which provides the buy-side with a third-party view and enables universe comparisons,” said James Bryson, president at US-based TCA provider Elkins McSherry.
Michael Sparkes, managing consultant for analytical products at ITG, argues that independent TCA providers invest more heavily in the technology, modelling and processing required for in-depth analysis than non-specialist firms. “It’s hard for even the largest asset managers to put that level of commitment and resource in their TCA,” he said.
ITG, which operates both agency brokerage and TCA businesses, currently holds data for around $18 trillion of trading activity for 300 clients globally.
Steve Wood, global head of dealing at Schroder Investment Management, has seen no need to replace or supplement the firm’s existing TCA processes.
“The ITG system allows us to drill down and obtain granular information on transaction costs,” said Wood. “We use this data in a multitude of ways through our quarterly review structure to analyse costs on a global, desk and broker level.” Schroder also uses the data to analyse not only trading costs, but also trading strategies, tools, best execution compliance and slippage.
So where does this leave the role of broker-provided TCA? Certainly, some brokers have been quicker than TCA providers to provide venue-specific execution data. And an increasing number are providing real-time execution data to help clients identify liquidity. But Wood suggests that the different formats and methodologies used by individual brokers make comparisons tricky. Jason McAleer, head of trading, Newton Asset Management, says that the value of broker TCA is limited by the fact it is often designed to demonstrate adherence to a best execution policy rather than provide an objective measure of performance.
Brian Gallagher, executive director, Morgan Stanley, considers that broker execution analysis has a particularly important role in assessing the performance of algorithmic trading strategies.
“I thought TCA providers would have got more of the vote because of the objectivity buy-side firms want from an independent firm,” said Gallagher. “However, we believe the best way to measure our algorithmic performance is to back-test strategies using our own data, especially as we can capture all of the pertinent information on the order, as data integrity is crucial to the process of effective measurement.
“It’s also very useful in demonstrating the effectiveness of our algorithms to our clients and advising them on when and how to use specific strategies.”
Frustrated by the slowness with which some TCA providers have adapted to a more fragmented equity market, notably in Europe, a large number of buy-side firms are investing in their own execution performance analysis capabilities.
Elkins McSherry’s Bryson acknowledged that tailoring analysis to individual requirements sometimes required in-house input.
“Looking at costs more deeply and from a proprietary perspective can be beneficial for asset management firms to understand how their costs affect their individual investment process,” he said.