August 15, 2011

Before last week’s ride wild ride in the financial markets, institutions were turning to transactions cost analysis (TCA) to assess and improve trade performance.

A study by Greenwich Associates, released today, examined the evolution of TCA through a survey of 498 institutions in North America Europe, Latin America, and Asia. TCA was originally adopted for compliance, said Greenwich, but over time it has become more integrated into the institutional investment process for improving trade performance, according to the study’s findings.

In 2011, 35 percent of the institutions participating in the research and consulting firm’s annual U.S. Equity Study said their compliance departments used TCA systems to ensure best execution. Almost 40 percent of the institutions said they use TCA systems to assess broker performance on internal trading desks, 38 percent said they employ TCA to identify outlier or problem trades, and 37 percent said they use TCA to measure active trading.

“The responses represent a reversal from 2010 results in which compliance toppled all other functions, with the exception of identifying outliers, as the primary role of TCA for U.S. institutions,” commented Greenwich Associates Director of Institutional Marketing, Jennifer Litwin in the release. “If that trend carries over to other markets around the world, 2011 could emerge as something of a watershed moment in the development of TCA — the point at which institutions started viewing these systems as something more than ‘check-the-box’ compliance tools.” While some institutions still harbor serious concerns about the shortcomings of TCA systems, Greenwich says they are beginning to expand the role of the TCA process in their organizations. TCA was first deployed on equity trading desks, but the responses show that TCA is expanding into other asset classes.

Of those respondents who identified themselves as active equity investors, almost 70 percent employ TCA in their investment process. However, about a quarter use TCA in fixed income, and a similar percentage employ TCA in foreign exchange trading. While it is still early days in the development of TCA processes, Greenwich study results suggest, that outside of the world of equity trading, TCA systems are starting to get some traction in fixed income and foreign exchange.

In terms of ranking and assessing the major providers, 56 percent of institutions that use TCA employ a system from ITG/Plexus, which is the dominant TCA provider in North America, where it is employed by 65 percent of institutional TCA users, and in Continental Europe, where it’s used by 56 percent. Worldwide, about 20 percent of institutional TCA users employ a system from Abel Noser, and about 15 percent use Bloomberg TCA.

Greenwich Assoc. also asked users of these providers to rate the systems across a variety of categories. When it comes to confidence that clients have in the data within TCA reports, ITG/Plexus tops other major providers by a significant margin.

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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 ...