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MarketAxess Research Introduces TCA for Fixed Income

The electronic trading platform's research arm is offering a proprietary method for analyzing and reducing transaction cost in less liquid corporate bond markets.

MarketAxess, operator of a leading electronic trading platform for high-grade corporate bonds and other fixed income securities, has introduced a proprietary approach called REXIQ to calculate and analyze execution costs in fixed income securities.

REXIQ — which stands for Reducing Execution Costs — was developed by MarketAxess Research and is the first formal methodology for measuring transaction costs in the less liquid corporate bond markets, according to the company.

While in liquid securities such as equities, there are many widely accepted ways of measuring trading costs, known as transaction cost analysis or TCA, this is a new field in over-the-counter securities such as fixed income.

MarketAxessResearch looked at the embedded costs of trading, consisting of the dealer mark-up plus any fee associated with executing the trade. It was therefore possible to determine the cost of execution by comparing the electronically executed trade to a ‘prevailing market price’ using corporate bond market data from FINRA’s TRACE.

Initial analysis by MarketAxess Research showed the average cost savings of electronic execution for all trades during the period analyzed was 5.2 bps, compared to the calculated to the Volume Weighted Average Spread (VWAS).

For this initial analysis, MarketAxess took a sample of 900,000 TRACE-reported trades over a 24-month period from January 2009 through December 2010.

In the company’s release, Rick McVey, Chairman and CEO of MarketAxess, said: “REXIQ can deliver insight into the corporate bond market to help fund managers meet fidicuary responsibilities. Our research validates the value of e-trading as a tool in achieving transaction cost savings and improved portfolio returns. Using this methodology, we are providing our institutional investor clients with regular, robust analysis of their execution costs to support their best execution requirements.”

Commenting in the same release, release, Alex Sedgwick, Head of MarketAxess Research, said: “The advent of FINRA’s TRACE reporting combined with greater adoption of electronic trading for fixed-income has allowed us to develop an objective approach to examine trading costs in new and compelling ways. Using this data, MarketAxess Research developed the REXIQ methodology – a credible methodology for demonstrable transaction cost analysis, formalizing the value of fixed-income TCA in support of best execution.”

Separately, new independent academic research from the University of California, Berkeley, shows that there are material reductions in trading costs for users of electronic trading tools that source liquidity from a greater number of counterparties.

Authors of the academic paper, Terrence Hendershott and Ananth Madhavan, maintain that increased (auction) participation sharply reduces costs. "To the extent that technology will continue to reduce search costs, these results support the view that even traditional bastions of over-the-counter trading will face strong competition from auction type markets. More practically, the results confirm the value to traders and investors from sourcing liquidity widely and using tools to optimally select a venue. We show that these gains are significant and can materially influence realized investment returns.”

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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Greg MacSweeney
Greg MacSweeney,
User Rank: Apprentice
10/8/2013 | 9:43:36 AM
re: MarketAxess Research Introduces TCA for Fixed Income
While it does seem that electronic fixed income trading is picking up, I wonder how much resistance e-trading is getting from the established firms? After all, bond trading is a big business with pretty nice margins (compared to the equities space). The last thing the big brokers would want to see is e-trading forcing smaller commissions.
User Rank: Author
10/7/2013 | 5:52:05 PM
re: MarketAxess Research Introduces TCA for Fixed Income
I agree that best execution in fixed income will become more important as buy side firms adopt the new e-trading venues and have to justify why they chose one venue over another. TCA will become essential to measuring the costs and users will be offered an array of choices from the venues as well as independent third parties.
User Rank: Apprentice
5/24/2012 | 10:52:24 AM
re: MarketAxess Research Introduces TCA for Fixed Income
In a Global Fixed Income Market there is a need to maximize cost efficiency and execution in a market changing under regulatory pressure. In light of regulatory developments from a Dodd-Frank domino effect and given its steady increase over the last year, fixed income electronic trading is a very busy arena at the moment. Encompassing strides forward in technology and best execution, e-trading is an industry that is evolving and changing at an ever increasing rate.
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