Trading systems providers Fidessa and ConvergEx Group have each released new transaction cost analysis (TCA) tools, while TradingScreen the provider of multi-broker execution management systems, has launched a consultation paper with a consortium of brokers, suggesting best practice in TCA.
Fidessa's free, web-based solution is designed to provide European consolidated trading analysis. The Tradalyzer combines a set of industry-standard benchmarks together with a consolidated view of the trading landscape provided by the Fidessa Fragulator to provide an independent assessment of individual trades and trading strategies.
It allows users to input the parameters of a trade – such as stock ID, price, direction, start and end time – which is then compared with the consolidated view from Fidessa's ticker plant. It is intended to give a picture of market momentum, price and volume distribution, as well as showing gains or losses against volume weighted average price (VWAP), time weighted average price (TWAP) and other industry benchmarks. It also offers analysis of alternative outcomes, including gains or losses, available from other relevant lit and dark venues.
“It gives a trader an immediate sense of how they have done compared to the market; if I am buy-side I can check my performance on individual trades, or ask what would have happened if I had traded just in the afternoon or just in the morning?” said Steve Grob, director of group strategy at Fidessa.
ConvergEx Group has introduced a new TCA Framework via its Eze order management system. The Framework is designed to offer a flexible software architecture that offers users TCA tools from major providers.
Investment bank Barclays Capital is the first to integrate its toolkit into the platform; Portfolio WebBench offers pre-trade and post-trade analytics for equities, exchange traded funds, currencies, equity index futures and convertible bonds. It also features over 60 reports to provide insight through portfolio construction to post-trade analysis.
“With a growing need for order transparency and best execution analysis, our clients are adopting more TCA tools into their workflows,” said Jeff Gavin, director of global product management for ConvergEx's Eze Castle Software.
Best practice guidance
Brokers Bank of America Merrill Lynch, Citi, Nomura and UBS, supported by TradingScreen, have set out TCA best-practice suggestions for comment, in a consultation document titled ‘Transparency and Standards in the Provision of Transaction Cost Analysis.'
Firstly, the paper states that transparency of methodology and calculations is critically important to ensure debate between interested parties is informed and valuable. Secondly, it emphasises that consistency in application of methodology and calculations is essential for effective analysis. Thirdly, the document points out that statistical problems often exist in terms of typical client transaction numbers, but suggests that these can be offset by provision of appropriate measures and explanations within the analysis.
The paper foregrounds transparency and consistency, suggesting the Almgren/Chriss methodology for pre-trade cost estimates as a useful current working method – Robert Almgren and Neil Chriss published a paper in 2000 that set out a methodology for optimal execution of portfolio transactions – however more recent methodologies may become more appropriate over time, the new report says.
Other key recommendations include stipulations that a ”core level' of periodic TCA should include measures of implementation shortfall (slippage from release time and decision time); market participation (interval VWAP conditioned to take account of bid/ask spreads); participation weighted performance (based on client ”target rates' of participation); pre-trade cost estimation based on a single, ”transparent' calculation methodology; and the frequency and timeliness of analytical reports should be agreed with clients, complementing rather than competing with end-of-day or real-time trade management reports.
The report argues that ”point in time' benchmarks should be based on mid-point of best quotes at the time, except where the time is within auctions at open or close and that all benchmarks should include agreed coverage of different lit pan-EU trading venues, sufficient to cover 80-85% of activity on average over time. It adds that ”over time' (VWAP, TWAP) measures should be based on standard use of condition codes for inclusion/exclusion of particular transactions.
A final white paper on TCA is expected from the four banks later this year, once the responses to the consultation have been processed. The consultation closes on 13 May.