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Does TCA Really Work for the Buy Side?

Transaction cost analysis promises stronger executions. But buy-side trading desks may not always know how to pinpoint the information that can actually help them get the most out of their trades.

In addition to pursuing a real-time picture of what's occurring in the market, Robeco also is using TCA to help it trade more effectively within a portfolio manager's objectives. "You start by looking at a portfolio manager's historical trade profile to identify any tendencies related to things like trade timing and momentum to more effectively work their orders within the context of the market," Kuzminskas explains. "Through our analysis I have seen the extremes where I may need to execute with more urgency for Manager A, while the execution path for Manager B requires me to slice the order into the market more gradually."

Before and After Pictures

But while it is necessary to equip the trading desk with real-time analytics, many traders say pre-trade TCA also is valuable, as it can provide historical context and insights into how a trade should be executed under certain market conditions. Jason Lenzo, director of trading for equity and fixed income at Russell Investments, a dually registered broker-dealer and investment adviser, says it's important to use pre-trade analysis in conjunction with real-time TCA. "We have real-time analytics and we have historically based pre-trades that integrate as much of the real-time market information as possible," he relates, noting that Russell uses its own proprietary TCA and quant platforms alongside systems provided by third parties.

In order to build effective predictive models, however, post-trade analysis is critical as well, according to Eldar Nigmatullin, a senior quantitative trader at Alliance Bernstein, who says post-trade analysis aids the desk in designing those models. "Quality pre-trade and intra-trade models are a key toward improving performance and capturing alpha," he insists. "A good TCA platform provides comprehensive analysis post-, pre- and intra-trade."

Yet, in order to consistently get value out of TCA and tailor it to their specific goals, some firms -- including Russell -- have taken the additional steps of using more than one platform and even building their own systems. "Using only one system or approach may give a bit of a one-sided perspective," Russell's Lenzo explains. "Perhaps a system might be particularly well-suited for looking at a comparative universe but doesn't get granular enough to refine and translate to the point where it's answering a trader's question about how to improve. As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio

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