TCA use surges among equity buy-side traders

TCA on buy-side equity trading desks no longer considered an optional feature, but a necessity in new regulatory environment.

Regulatory upheaval has resulted in a surge in the use of transaction cost analysis (TCA) on buy-side equities desks, according to new research.

Greenwich Associates’ latest report revealed nine out of ten equity trading desks, or 86%, now use a third-party TCA system, compared to less than three quarters in 2014.

The research said the surge indicates TCA is no longer an optional feature on trading desks, but instead has become an essential component.

Regulatory changes such as MiFID II in Europe and the Securities and Exchange Commission’s order transparency rules in the US are driving demand for such services due to an increased focus on best execution and trading analytics.

TCA vendors such as Bloomberg and ITG are set to benefit from the increased uptake, as the research suggests the growth will likely accelerate in 2018.

“With TCA systems deeply embedded into the workflow of trading desks, and investments in customisation and training already made, it creates a high degree of friction for trading desks to switch to a new system,” said Richard Johnson, vice president of market structure and technology at Greenwich Associates and author of the report.

The use of TCA in fixed income trading has played out differently in comparison to equities. Unlike exchange-traded markets, fixed income trades primarily over-the-counter, meaning there is a lack of data and benchmarks to compare trade performance.

A separate report published by Greenwich Associates in March last year revealed the use of TCA in foreign exchange is ahead of fixed income in terms of buy-side adoption. This was driven by a more accessible data set for analysis and increased use of algorithmic trading and electronic trading venues.

At the time, the research stated 81% of equity trading desks used TCA, whereas just 32% of fixed income desks and 58% foreign exchange desks use the tool.

Market participants have predicted greater adoption of TCA in fixed income as a tool to inform trading decisions and depict performance, as more data becomes available under new regulation.