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Measuring Trader Alpha With TCA

Many firms are hesitant to measure trader performance using TCA, but Franklin Templeton is relying on a new benchmark to gauge trader 'value add.'

TCA By the Numbers

A report earlier this year from TABB Group, "Imperfect Knowledge: International Perspectives on Transaction Cost Analysis," predicts that the use of equity post-trade TCA among U.S. and European firms will climb to 90 percent by 2009, with 38 percent of those firms looking at TCA on a daily basis.

The study also found that almost two-thirds of U.S. and European equity firms currently spend more than $100,000 a year on TCA. And TCA already is moving beyond equities, with 58 percent of U.S. buy-side foreign exchange traders working to measure execution quality and transaction cost. In addition, 25 percent of equity options traders report using internal models to accomplish this.

When it comes to using TCA to measure and compensate traders, the study found that nearly 75 percent of firms do evaluate traders against TCA, but only 25 percent believe TCA should be used as part of trader compensation. For firms that are using TCA as part of trader compensation, they report that up to 20 percent of bonuses are based on TCA.

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