The second afternoon of TradeTech Europe 2014 devoted a whole stream to transaction cost analysis (TCA), and in particular, the buy-side perspective. All speakers made clear that traders want to use TCA to improve trading performance.
As Dale Brooksbank, head of European trading, State Street Global Advisors put it: “TCA is used at every stage to monitor, analyse and improve the investment process. From portfolio manager to desk, desk to broker and where possible broker to execution venue.” All agreed that TCA was no longer just a ‘box ticking’ exercise to satisfy compliance and some clients. Rather there was a recognition that most asset managers regard TCA as a way to improve investment returns for their firms.
While the level of interest is very keen and very serious, speakers reminded the audience that key challenges remain. First among these is still data integrity and consistency. Brooksbank wants to see “industry standard time-stamps and data flags, a European consolidated tape, standard calibration methodology and a Market Model Topology (MMT) that standardises how orders were tagged by brokers and venues.”
Other panellists had similar needs, but in the meantime everyone is making do with what they have. Both Adrian Bradshaw, senior equity dealer, Invesco Perpetual and Milos Vukovic, vice president of investment policy, RBC Asset Management considered a key part of TCA as being able to match benchmarks to trade types and/or portfolio manager trading styles. As Vukovic put it “While arrival price and implementation shortfall measures are relevant for news based or momentum trades, participation benchmarks may be more appropriate for regular trading and reversion is key for trades completed in less liquid stocks.” The use of TCA was seen by all as adding to the communication process between the desk and portfolio managers. This alone was sufficient justification for continuing to find ways to explain how the two areas within an asset manager can combine to deliver improved investment performance.
While cost analysis is a factor in broker selection Bradshaw stressed the continuing importance of “sales trading coverage, commitment of capital and real IOI information” as being as important as TCA when looking at broker performance and commission allocation. Given the role of TCA as an adjunct to rather than a driver of broker evaluations it is not surprising that all speakers remain concerned at the sheer volume of data that is involved in effective TCA. Looking at outliers first and providing an explanation of those was for Bradshaw the only way to keep the volume of work associated with TCA under control.
Jens Jacob Foged, prop trader, Viewpoint Investors chaired the panel session and also provided insight from his own experience. He also focussed on the need to look at the question of “Why trading costs are being measured, as much as how or who is being measured.” He felt that often too much emphasis was placed on trying to evaluate venue, broker or trader information where in fact it was the trades that were important to assess and where possible improve. This brought the topic to the somewhat controversial question of whether TCA should affect trader compensation. Bradshaw summarised the situation and the challenge. “Traders want to be seen as a value adding part of the investment process. At some point their success must impact their compensation. However we are not there yet.” For Vukovic the position was similar. “Trader compensation is affected by TCA results. The impact at present is quite small but we expect it to grow.” Foged himself and Brooksbank simply stated that at present TCA does not affect compensation.
Larry Tabb, CEO of TABB Group closed the session by commenting on a range of developments among traders and trading, revealed in a recently completed survey. TCA was only a passing aspect of that review, reflecting the fact that though relevant, there were more important things happening in the trading marketplace. Given the energy and commitment of the earlier speakers, that was a disappointment but perhaps reflects a truer reality for both providers and users of TCA. It is necessary and relevant but is only going to make an impact at the periphery of the trading process.