Fifty-seven percent of buy-side traders would change their trading practices if transaction cost analysis (TCA) played a larger role in determining their compensation, according to a new survey from consulting firm Greenwich Associates.
The survey, which asked institutions in the US, Canada and Europe about the use, effectiveness and shortcomings of TCA tools, also detected a reluctance to rely heavily on TCA when determining buy-side traders’ pay as a result.
Only 20% of respondents said TCA should play a large or extremely large role in determining compensation. Nevertheless the buy-side appears keen that TCA plays some role in setting compensation; only 23% of respondents said TCA should not be taken into account. The remainder of responses fell in the middle of these two extremes.
Critics of using TCA as a primary determinant of compensation warned that the practice would prompt traders to change their approach, and that some may be tempted to manipulate the system to produce results that maximise compensation. “There are always ways to game TCA,” said a trader for a US hedge fund.
The survey showed that buy-side traders and other decision-makers are generally satisfied with their TCA providers and a majority sees the tool as an important contributor to functions such as managing internal trading desk performance and regulatory compliance. However, the buy-side also has reservations about TCA. Greenwich reported that respondents were less enthusiastic about the ability of TCA to add value to the process of allocating business to broker-dealers. Also, only a modest proportion of respondents thought TCA could strongly affect investment returns.
Respondents that were unsatisfied with TCA expressed similar concerns to those that shun it altogether, commenting that TCA systems are inflexible and fail to take into account constraints and other aspects of the investment process that influence a trade.
“It is important for TCA results to reflect – and for everyone at the institutions to understand – that implementation of investment decisions is a process, not an instantaneous event,” said Jennifer Litwin, Greenwich Associates’ director of institutional marketing, in a statement.