When Jefferies LLC set out to pick a provider of transaction cost analysis this fall, it surveyed the landscape of providers, observing that many suppliers were housed in brokers.
While Jefferies previously developed its own trading analytics, the brokerage firm decided to scrap that approach. Instead the firm selected Markit, an independent provider of TCA with a service that is gaining traction on both the buy and sell sides.
"I think the market is in need of some sort of standardized TCA," says Bill Bell, global head of electronic and program trading at Jefferies. "When I looked at the standard providers out here, Markit's strategy was best aligned with ours," said Bell.
Among the reasons it selected Markit, Bell says, "Markit has no execution stack and they are purely complementary to Jefferies as a technological solution. They are multi-asset class, they are global and they have no conflict of interest, i.e., trading capabilities," he says. Jefferies began using Markit's TCA in November and the feedback has been positive both from clients using the service and from those considering it, he says.
On various industry panels, there has been a debate on whether the market is moving away from other broker's in-house applications. Bell says he chose Markit so that when he's sitting in front of a head trader, he can explain. "They don't compete with us. They're completely agnostic and they are a third-party solution provider."
The change comes as Jefferies, under Bell's leadership, plans to grow its institutional trading algorithmic business. In the past three months, the firm has added 60 new clients, and its market share has doubled after a record month in October. With a client-centric approach, Jefferies is building out customized algos.
"We are going to stick to our knitting and what we are good at -- that's providing best in class algorithms that help us source liquidity for our clients, moving liquidity from point A to B and not incurring market impact," explains Bell, who left Barclays in March to join Jeffieries in July.
Jefferies will use Markit's TCA for its algorithms to show performance metrics to its buy side clients. "Partnering with Markit will help clients in deciding on which algo providers to use, based on how they are scoring versus their peers," says Bell. "When I look at how we plan on growing our institutional algorithmic business, we score very well when it comes to any sort of bake-off that is matching us up versus our peers," he says.
Brokers have a best execution requirement to report to their clients on the buy side about the quality of their executions, observes Henry Yegerman, director of analytics and research at Markit. With the current regulatory scrutiny and focus on market structure and transparency, Yegerman suggest that sell side firms are more comfortable handing off the reporting to a neutral third-party.
"This is illustrative of a broader trend which is the importance we place on building a community of buy and sell-side firms that use the same kind of TCA methods to analyze trading performance," comments Yegerman. A key benefit to Jefferies is data consistency since clients on the buy and sell side can talk about the same metrics, he says.
Need for consistency in TCA
"Very often what's happened in the past in this business, the buy side firms would have one set of TCA and the sell side form would have other TCA reports and there would be slight differences in the calculation methodology," says Yegerman.
For example, someone could point to slippage based on the midpoint between the bid-and- asked, vs. someone using slippage tied on the last price. "So they couldn't reconcile and their quarterly meetings were less effective," he says.
One of the benefits of Markit is common metrics that is used on both the buy side and sell side, plus some proprietary trading costs to understand trading costs, he underscores. "That enables them to talk about things like the velocity of their algorithms or their order routing using the same metrics and the same conceptual framework," says Yegerman.
According to Yegerman, the service will enable Jefferies to analyze their own performance internally and to provide client reporting and execution consulting to their clients. However, execution consulting tends to be extremely customized and labor intensive for these banks.
What is of value to brokers is that Markit provides a production-sized scalable solution so they can extent execution quality reporting to a greater number of their buy-side clients, says Yegerman. Markit's TCA works on every kind of venue, besides equities, it provides FX TCA and is rolling out other asset classes as well, says Yegerman.
An important differentiator from other solutions is that the TCA runs on Markit's platform, says Bell. "They run the TCA on our data, and executions are drop-copied back to Markit's secure site, which is walled off specifically for Jefferies," he says. In terms of data privacy, institutions are protected and can't see anyone else's flows.
One of the trends in the industry is venue and order routing analytics, which is addressed by Markit down to the sub-route level. "We want to see where we went with the order, where we got filled and where we went and did not get filled," says Bell. "Those are really important metrics when we're digging into the data with our buy-side clients," says Bell.
Markit performs "that kind of detailed analysis on smart-order routing logic on both lit and dark venues," notes Yegerman. "This is one reason that a lot of sell-side firms want to show they are making every effort to be totally transparent here, and part of that is having the reporting down by an independent third party," he says.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