TCA tools and ‘in-house expertise’ crucial to satisfying best execution

TABB Group research finds buy-side will need third-party TCA tools and in-house expertise, to survive fixed income evolution.

Third-party transaction cost analysis (TCA) tools will become the new industry standard for satisfying best execution requirements in fixed income, according to a report by TABB Group.

A combination of in-house expertise and third-party market analysis tools is set to standardise industry practice, as regulation continues the fixed income market ‘evolution’.

Reliance on independent benchmarks to track execution performance and dealer quotes or TRACE feeds for price discovery is no longer sufficient, TABB said, meaning buy-siders must look elsewhere.

Pricing is “central to the problem” as it presents challenges for fulfilling best execution requirements, but fixed income TCA tools are the answer the report said. 

A poll of 93 traders carried out by TABB Group in late 2015 showed an overwhelming majority rely on TRACE reporting, second only to utilising in-house expertise.

TABB Group wrote: “This culture of complacence will have to change as regulators update and enhance the required standard, and internal processes are changed in line with the mode of trading.”

The report added: “Established companies such as ICE Data Services, Markit, and Bloomberg are ahead of the curve in bringing, for the first time, robust TCA analysis to the otherwise murky fixed income marketplace.”

Ease of integration with existing workflows will differentiate the good TCA tools from the bad, the report said.