The Top Three Transaction Cost Analysis System “Must Haves”

Transaction cost analysis (TCA) seeks to shed light on how fees and market impact add to the cost of buying or selling a particular security. These costs take the form of higher commissions to a particular broker or information leakage and liquidity issues, causing wider spreads between bids and offers, and price movement.

Increased regulation, compliance oversight, lawsuits, and the migration of OTC securities to electronic execution are just a few of the industry trends that are driving the buy side’s widening interest in TCA. But, these “it’s important to eat your vegetables” reasons aside, the best argument for adopting TCA is the fact that it helps generate alpha, by lower the cost at which you buy and sell securities increasing total returns.

As the buy side moves to adopt TCA tools more proactively, there are three main things that firms should look for when assessing systems:

  1. Is it independent? The level of insight provided by a TCA system is correlated with how much data it can access. If you have a system that is only looking at a handful of brokers, even the most sophisticated analysis will not yield a great understanding of how your costs compare. Independent multi-broker systems can provide access to a wide array of broker data and because these systems do not take any commissions, they provide a more trustworthy third-party view of what is going on in the market.
  2. Is it real-time? TCA is still associated with monthly, backward-looking checks that show how much value traders added by avoiding high fees. However, the latest generation of TCA can examine the markets in real-time, providing traders with information on costs and potential market impact of trades before the security is bought or sold. More specifically, rather than TCA offering “better luck next time” advice, it can actually improve the trader’s performance during the execution process.
  3. Is it multi-asset? Regulatory changes spur the migration of over-the-counter (OTC) products to electronic trading. As multi-asset trading becomes the norm, there is the potential for adverse price movements and opaque fees built into a secondary settlement transaction to erase your hard-fought gains. Multi-asset TCA systems can help avoid some potentially expensive mistakes.

We are at a historic time in the development of the financial markets, as changes in technology and regulation drive the development of transparent, efficient electronic trading across all asset classes.

This increased transparency cuts both ways for the buy side. On the one hand, the buy side is now under greater pressure to provide its value in a trading setting. The stakes for failure in this area can be high, as recent lawsuits in the foreign exchange space have demonstrated. On the other hand, the potential benefits are substantial, as the buy side is now better able to identify the best brokers, venues, and algorithms to apply in any given setting and asset class.

The market is moving in a direction that provides many challenges and huge opportunities for the buy side. Having the right tools in place will make all the difference between merely surviving, or succeeding in a world where every asset type is traded on a single screen.*

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Also, click the link to learn more about TradingScreen’s real-time TCA for foreign exchange.