According to a new TABB Group study released on Tuesday, equity post-trade transaction cost analysis (TCA) usage among U.S. and European firms will reach nearly 90% by 2009, with 38% of those firms examining TCA on a daily basis. Nearly two-thirds of US and European equity firms now spend over $100,000 per year on TCA and larger firms, when including internal development costs, now spend $200,000 per annum on average.
The report, entitled 'Imperfect Knowledge: International Perspectives on Transaction Cost Analysis', finds that 58% of US buy- side FX traders have already attempted to measure execution quality and transaction costs. Similarly, 25% of equity options traders now use an internal model to track their execution quality and transaction costs.
“TCA usage is far more widespread than other oft-cited components of modern day trading like algorithms, execution management systems and crossing networks because the desire to measure performance cuts across nearly all trading styles, investment strategies, geographies and even asset classes," explains Adam Sussman, director of research, TABB Group and author of the report. "Today, it really doesn’t matter if you’re a trillion-dollar, quantitative mega-manager or a bottoms-up stock picker with $50 billion in assets. Both scrutinise their post-trade TCA at least once a week,” he adds.
While regulation and transparency are the keys to enabling more precise execution measurement, the benefits of TCA are still contested, says Sussman. Nearly a quarter of those interviewed see volatility as the main driver of unavoidable transaction cost, while others cite order size and a stock’s liquidity. The question is no longer whether there should be TCA on the trading desk, but how it is incorporated into the process, finds the report.
“The small number of traders still free from TCA’s impact is dwindling as MiFID exerts its influence," explains Sussman. "However, at the same time as usage spikes, we expect European TCA to become more accurate as reporting requirements force more trade information into the public domain. But the European market microstructure is about to undergo a change as new execution venues threaten to fragment liquidity and introduce new business models requiring traders to revisit trading strategies and costs,” he explains.
The report also finds that nearly 75% of firms evaluate traders against TCA, while others believe measuring individual traders discourages teamwork. Approximately 25% of equity trading firms believe TCA should be used as part of compensation for traders. Among firms already using TCA-based compensation, up to 20% of bonuses are based on TCA. Thirty-seven percent of US equity traders attribute decreasing transaction costs to better tools and market data.