If trade-cost analysis could do more than be a compliance tool or give a general tracking of overall desk performance, the buyside would embrace it more. If given a choice, the buyside would want TCA results to contribute toward finding a better trading process that lowers trading costs and improves investment performance, according to a recent Greenwich Associates study.
The latest "Greenwich Market Pulse" reports that institutions are fairly satisfied with their TCA systems and providers. However, the survey results suggest their satisfaction is related mainly to the use of TCA as a tool for basic blocking-and-tackling issues, like compliance and trading desk performance.
Indeed, institutions have expressed "disappointment" and "frustration" with trade-cost analysis’ inability to identify opportunities for institutions to improve overall performance by wringing new efficiencies out of the trading process, Greenwich wrote.
"There is definitely a need for a ‘check-the-box’ type of product that satisfies compliance standards, and current TCA offerings seem to function well in this capacity," wrote Jay Bennett, co-author of the study. "But for institutions hoping that TCA can provide them with a more sophisticated tool, our research suggests there is still much work to be done."
According to the study, institutions are not content with the "actionability" of their TCA vendors’ analysis–that is TCA’s ability to find new efficiencies in the trading process to raise performance. Approximately 30 percent of institutions describe the analysis they receive from their TCA systems as actionable; 20 percent say it is not actionable. The balance of the survey respondents said they were not sure.
Interestingly, only 25 percent of those surveyed said they include TCA results to compute compensation on the trading desk. "In our TCA research, traders and their managers have both warned that, because they feel TCA systems fail to take into account all the variables that affect trade outcomes, buyside traders would game TCA systems if their compensation was tied to those results," said John Colon, a study co-author.
Dennis Fox, head trader and director of equity trading at Munder Capital Management, said he is content with his TCA system, but he’d like to see some additional enhancements that would benefit his trading desk. First, he’d like to have the ability to analyze data better online. Second, he’d also like to see a peer comparison or ranking that compares his trades against similar trades done by other traders.
"I hear from others on the buyside complaints about TCA–like how it lacks the ability to estimate a trade properly," Fox said. "I guess at some point, TCA is based on what you’re expecting. You can take the data from your TCA and find efficiencies. If you’re expecting them [providers] to come up to you and say they found efficiencies, then everybody would be in the same boat. Everybody would have them, and then it would be worthless. Each individual firm has to take its own data and analyze it and make some decisions from it."
The survey outlined other problems. For example, only one in five institutions said the accuracy, richness and depth of their core trading data is consistently adequate. Also, 45 percent of institutions said assigning the correct benchmark for each trade is either problematic or extremely problematic in their TCA process. Finally, nearly 40 percent of institutions cite a lack of credibility of current TCA results in the support of best execution requirements as an ongoing challenge.
However, Fox said he was comfortable with the adequacy of his TCA data. But when it comes to the credibility of the results TCA produces, he said they should be taken with "a grain of salt." TCA, as he views it, is not an exact science but an estimate or best guess.
Approximately 80 percent of U.S. and European institutions that use TCA in their trading process use a third-party vendor. About 40 percent of institutional users employ a broker-provided TCA tool, while 30 percent use proprietary in-house systems.
Peter Weiler, executive vice president of sales and client services at TCA vendor Abel/ Noser, said TCA is a tool that requires the client to provide an adequate amount of data in order to maximize its accuracy. That has presented a problem in the past. Some order management systems and firms provide adequate data and allow firms to get the most out of their systems, while others do not, he added.
"The data we get from clients is getting better and better," Weiler said. "Some clients are more diligent in filling out the data fields and that affects actionability. Once that data is correct, then they can maximize the TCA, and with us, get recommendations and create strategies and tactics."
Furthermore, Weiler said TCA users need to be consistent in terms of the benchmark being used throughout the whole organization. That is, some problems arise due to the fact traders sometimes get conflicting benchmarks from various portfolio managers and that might be where the problems in TCA usage and output arise.
Greenwich conducted its survey from Sept. 27 to Oct. 4, based on interviews with 114 institutions in Europe and the United States. The majority of the firms had at least $3 billion in assets under management and produced a minimum $5 million in annual equity brokerage commissions. Seventy-five percent used TCA as part of their investment processes.
The report broke down of institutions that use TCA by their commission levels. It divided the respondents into four group: All the firms with more than $50 million in annual commissions used TCA; 67 percent of the firms with between $21 million to $50 million in annual commissions used TCA; 57 percent of the firms with between $11 million and $20 million used TCA; and 83 percent of the firms with between $5 million to $10 million in annual commissions used TCA.
