The relationship between providers of transaction cost analysis (TCA) and buy-side traders has chilled. One might not quite say that familiarity breeds contempt, but both sides certainly feel a little taken for granted. Dealing desks once hailed TCA as a key tool for demonstrating their worth, a means of showing portfolio managers and end-investors the value, in basis points, of investing in the skills and technology to deliver best execution. But now, particularly in Europe, they feel that TCA providers have not moved with the times, have not kept up to speed with their evolving needs in an increasingly fragmented equity market.
In the Q1 2009 issue of The TRADE, Jon Clements, senior trader for UK and Europe at AllianceBernstein, extolled the merits of taking TCA in-house. “We have developed our own in-house real-time TCA product to engage our brokers in pursuit of continued enhancement of our trading experience,” he wrote. Since then, The TRADE has spoken to two other large US investment houses that have already put similar plans in motion globally and a handful of others that are weighing up the pros and cons. TCA providers got another earful at this year’s TradeTech industry conference held in Paris on April 21-24, when a panel of buy-side traders voiced a range of grievances. “My suspicion is that some smart order routing tools are not as smart as others, but I’d like to be able to prove it,” said Nigel Coleman, UK head of equity trading, Credit Suisse Asset Management.
In Europe, complaints have centred on the ability of TCA providers to source transaction data across the full range of trading venues that have mushroomed in the region since the MiFID regulatory framework was imposed in November 2007. This is still a work in progress for a number of providers and as such, buy-side firms have turned to brokers to obtain venue-specific data. But fragmentation is fundamentally changing the nature of buy-side information requirements.
In particular, buy-side firms are now looking to monitor and measure trade performance against their benchmarks in real time, with the aim of adjusting execution strategy even within the lifespan of the order, rather than seeking to keep a record from which lessons can be learned. UBS is one of a number of brokers that have recently launched real-time products in Europe as a complement to their execution algorithms and smart order routing capabilities.
“Real-time TCA systems allow the buy-side to perform transaction management and is something that brokers have been providing for a long time, even before the dominance of electronic trading, in manual form,” says Robert Kay, managing director of TCA provider GSCS Information Services. “Although buy-side firms like the independence of such systems, they do not look at the difficulty level of the trade or enable comparisons with the peer universe.”
Buy-side clients now request trade information from their brokers that they can fed directly into proprietary execution or order management systems to conduct real-time analysis. However, Kay also notes that the nature of real-time systems makes it harder to generate the consistent, consolidated data required to measure historical performance and observes that some firms may use proprietary and vendor or broker provided solutions in tandem. Indeed, AllianceBernstein’s approach is to use its own product in combination with existing providers.
Perhaps relations between buy-side traders and TCA providers simply need a little more communication and TLC.