How have buy-side priorities when it comes to TCA evolved in recent times?
Across asset classes things are nuanced, whether it’s fixed income or equities. Traditionally, the biggest evolution in transaction cost analysis (TCA) in general has been across both these asset classes. Speaking broadly, the prioritisation or the key focus more recently has been on the emergence of pre-trade TCA.
Where post-trade TCA is generally a well-known concept and widely adopted where needed, the pre-trade question is one which is now coming into the fore.
The question is ultimately ‘how can TCA – rather than being something you do after the fact, after the trade is done – actually help influence decision making prior to the actual trade being done?’ with the ultimate intention of improving outcomes post-trade. Overall, the attention is on how the market can better use it, and leverage it, to improve best execution.
How can trade analytics lead to better execution outcomes, what are you seeing at the moment?
Picking back up on the pre-trade piece. One of two things are possible now, because traders have more channels available to them for execution, one is to go down a high touch route where they take control of the trade.
Alternatively, they can go down a low touch channel where there would be some kind of automation rule-based technology. When it comes to these channels, the analytical element is becoming a useful input to help traders determine what is best for them, whether it’s high touch or low touch.
In our world, Rule Builder, our rulemaking engine has the ability to let you decide if you want to automate based on pre-trade TCA. For example, traders might typically choose a low-touch method of execution based on terms such as notional size of order, DV01 or comparing to average daily volume. Now, by using pre-trade TCA, you can say ‘I’m comfortable automating flow where the estimated market impact is not significant’. This new method allows for better, more nuanced, control over decision making as to whether you want to go high or low touch.
The point is that the market can use analytics as a sort of broad-brush stroke or adapt further as required and be a bit more sophisticated in the approach to help improve overall execution. The key is having trust in analytics being used – they must be defensible.
How does TCA use differ depending on the asset class?
TCA is in essence the ability to benchmark the performance of your execution desk. That’s a function of the data available and the question has become how much data you need to be able to create high quality benchmarks. You can look at OTC versus the listed space, the latter is an area where you have exchange data that can be used to help create effective benchmarks.
It’s far more challenging in the OTC space or in fixed income, not impossible, just more challenging as you look for access to high quality, good data, and importantly clean data from which to construct benchmarks.
Effectively what you’re doing is using TCA to measure your performance against. So, whatever the asset class, that’s the goal and right now there are some in the market, including Bloomberg, who are building products which are very practical and useable when it comes to that multi-asset transaction cost analysis, so the gap is being bridged.
What’s on the horizon for TCA, what are market participants after?
Our recent report analysing automated equities trading here at Bloomberg highlighted the tight link between trading execution and trading analytics. It’s well understood that automation can yield productivity benefits on the desk, and while there’s still some general level of concern about impact on jobs, I think it’s widely understood that tools can help augment and extend the capability of the trading desk.
Assuming most people accept that fact, the question is becoming ‘what about execution performance?’ or ‘what about transaction costs?’ In the same way that you would as a desk measure the performance of human traders against TCA benchmarks, are you doing that for automated trades?
If we look at TCA, it’s obviously a function that a trading desk would utilise, but it’s now investors in the fund itself asking more about TCA, which just shows that it’s becoming a bit more fundamental to the overall business of an asset manager. It’s not just a thing they have to tick off, it’s increasingly becoming a selling point for the fund.