The majority of institutional investors globally now use transaction cost analysis (TCA) in equity trading, a share that has risen steadily and continuously for nearly a decade, according to a new report from Coalition Greenwich.
Almost 90% of buy-side desks reported conducting TCA for their equity trading in the past year.
“TCA has long since moved past its early iteration as a ‘check-the-box’ tool for best execution,” said Jesse Forster, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of Equities TCA 2024: Analyze This, a Buy-Side View.
“Today, institutional investors are using TCA to refine their strategies, optimize performance and ultimately enhance their portfolio returns,” he said.
Used properly, TCA can provide vital insights into the efficiency and effectiveness of a desk’s trade implementation.
Institutions use TCA platforms to quantify the impact of various execution decisions on both implicit and explicit trading costs and to assess the performance of their brokers.
Almost 80% of the institutions participating in a study name post-trade analysis as the most important feature of an effective TCA platform, followed by compliance-related features such as oversight/reporting.
Half of these buy-side desks say they are conducting a meaningful analysis of TCA results—as opposed to just skimming or reviewing—on a quarterly basis, widely accepted as the sweet spot for analyzing overall performance and making corresponding changes to order routing.
“As trading continues to become increasingly complex and competitive, understanding and minimizing transaction costs is paramount for investors seeking to maximize returns,” said Forster.
TCA results have also become a critical metric in institutions’ evaluations of broker performance.
More than 80% of institutions that use TCA say the systems play an important part in broker assessments, with one-fifth of institutional trading desks relying on TCA exclusively for such reviews.
According to the findings, 83% of the buy-side stresses the importance of quantified TCA in evaluating broker trade performance, with 17% of them relying on it almost solely for performance evaluation.
Just 6% said post-trade TCA data was unimportant in their review process.
According to the findings, the vast majority of managers (85%) rely on third-party providers to produce TCA, while 26% (generally the larger managers with $50 billion+ in AUM) use proprietary, in-house systems.
Equities TCA 2024: Analyze This, a Buy-Side View presents the full results on TCA from a Q4 2023 study that included interviews with 103 buy-side traders from around the world.
The report analyzes TCA adoption rates, primary uses, frequency of use, and most important features.
