More than half of asset managers have seen no improvements in transaction cost analysis in fixed income despite more data being reported under MiFID II.

A survey from Liquidnet University, Alpha in Execution: Fixed Income Trading, found that 56% of respondents have not seen any improvements in TCA since MiFID II went live in the European Union at the start of 2018. Liquidnet, the institutional investor block trading network, interviewed 37 firms with total assets under management of $13.9 (€15.8) trillion between December 2018 and January 2019.

Rebecca Healey, head of EMEA market structure and strategy at Liquidnet, wrote in the report that the buy side still finds it hard to find the data needed to enhance the execution decision-making process.

“Widespread industry frustration remains at the perceived lack of data quality available from Approved Publication Arrangements (APAs) today, alongside the challenges in interpreting best execution reports,” she said. “Participants complain of incomplete and inaccurate data, unnecessary complexity in terms of different fields to be reported and a lack of industry standardisation leading to the need to allocate valuable resources to clean up datasets before they can be used to derive real value.”

MiFID II extended best execution requirements from equities into other asset classes and mandated new transparency and post-trade reporting in fixed income for the first time. However, one quarter of respondents said they have yet to see any benefit from greater transparency.

Healey continued that the need to access alternative datasets from standard TCA remains a considerable challenge.

“45% of respondents acknowledge the greater availability of pre and post-trade data, but the lack of standardization complicates the ability to aggregate and analyse the output,” she added.

As a result, fund managers need to invest in technology to manage increase amounts of data and the trading desk will need to learn new skills. Three quarters of respondents said collating accurate data is the priority to validate successful implementation of their best execution policy.

Liquidnet’s @_RebeccaHealey shares her thoughts on the increased automation within the execution process for fixed income trading and what this means for the market; https://t.co/T65YH0Jzrz pic.twitter.com/UojAUAulZq

— Liquidnet (@Liquidnet) March 13, 2019

“Traders must be more IT aware and data driven in their approach, utilising available technology to feed analysis back into the pre-trade selection process,” said Healey.

Automated trading

One EU asset manager said in the Liquidnet report: “Automated trading will become much more important and there will be a shift to exception trade handling from the desk. Relationships and expertise of where to trade what and what data becomes available will become increasingly important.”

Chris Concannon, president and chief operating officer at MarketAxess, told Markets Media last month that fixed income is at the start of evolutionary change as  investors are looking to increase their use of algorithms and other electronic products.

He said institutional investors can get better pricing, and better meet their best execution requirements, with electronic trading. However, it is harder to define best execution in fixed income than in equities, which are traded via a central order book on an exchange.

“MarketAxess is in the process of  defining best execution, the equivalent for VWAP [volume weighted average price] in bonds, and has provided huge cost savings in its Open Trading product,” he added.

Open Trading is MarketAxess’ all-to-all trading model which allows the buy side to also supply liquidity, rather than the traditional model of only banks supplying liquidity to investors.

Buy-side spending 

A report from consultancy Greenwich Associates last month said that TCA is already ingrained in the equity workflow, but usage will increase in foreign exchange and cash fixed income this year. In 2018, 88% of equity desks globally performed TCA, compared to only 38% of fixed-income and 60% of FX desks.

“As firms continue to place even greater importance on efficiency driven by insights from data, making sure traders are armed with the right technological tools will be even more critical,” wrote Greenwich. “Regulation and other compliance requirements will further drive the importance of data and analytics on the trading desk, such as TCA and other best-execution metrics. Firms should use this period of rising budgets to invest in technology.”