FIX Trading Community, the non-profit, industry standard body, has published new guidelines for transaction cost analysis (TCA) in equities.
The recommended guidelines for TCA in equities are a result of the work by the FIX TCA Working Group. Citing the lack of industry standards and consistency across TCA providers, the FIX TCA Working Group said the goal of the recommendations is to address the challenges faced by market participants to determine the cost of trading at any or all points in the investment cycle.
The TCA Working Group found multiple methodologies and terminologies in current practice, which can result in a lack of transparency and objectivity while producing contradictory results. The lack of consistency can pose obstacles to broader adoption, it also said.
To address these concerns, the TCA Working Group polled its members to determine the specific problems. According to the TCA Best Practices document, the main challenges or areas of concern it found include: confusion around terminology and methodology; limited consensus on relevance of TCA practices to other asset classes; inconsistency and lack of clarity around condition codes/ liquidity flags used in the construction of universe data sets; lack of transparency and objectivity in analytical tools; complex TCA scenarios, such as fungible stocks trading simultaneously in different currencies across broker; and in Europe, the lack of a good consolidated tape, noted the document.
With strong interest from FIX members to eradicate these issues, two FIX Working groups have been formed. Working Group No.1 will focus on TCA terminology and methodology, and Working Group No. 2 will focus on the more granular (data and technology aspects of TCA, according to the document. Both working groups will collaborate to product a single consolidated document, in successive order.
“While the initial focus has been the glossary of terms, we have also provided TCA perspectives based on market structure and industry segment,” stated TCA Working Group co-Chair Michael Napper, director and head of Global Client Analytics Technology, Credit Suisse and Global Client Connectivity. “Additionally, we have also taken the approach to recommend best practices where feasible while recognizing some issues may never easily be standardized. Going forward, we will investigate the possibility of enhancing the FIX specification to facilitate the TCA data collection process.”
The benefits of this initiative will be industry-wide, spanning the buy side, sell side and vendor communities, according to today’s release. The initial scope of the project is focused on equities since TCA has dominated this asset class for a number of years, noted the release.
Currently, buy-side firms rely on a host of TCA providers to measure their trading costs, including Abel Noser, ITG, Markit (QSG), S.J. Levinsohn, Rosenblatt Securities, among others, that provide TCA services. How will the new best practice guidelines impact providers? Will they need to overhaul their methodologies to be in sync with the new FIX TCA best practices?
“The initiative is very much a Best Practices initiative. The purpose is to define a set of standardized terms and definitions that the whole industry can drive towards rather than saying that what providers are currently doing is wrong. Ultimately, the aim is to help all market participants with increased transparency,” stated a FIX Trading Community spokesperson.