Buy Side Gravitates to TCA

Terry Flanagan

Asset management firms are adopting transaction cost analysis (TCA) to guide short- and long-term portfolio management decisions and measure the performance of traders.

“Forward-looking buy-side institutions have put in place a well-integrated and tightly-coupled process for reducing transaction costs,” Jamie Benincasa, senior vice president of global sales at FlexTrade, told Markets Media. “It’s an investment process that can increase the universe of stocks that the portfolio manager is willing to trade based on lower variance of execution costs.”

FlexTrade’s TQM offers real-time and historical transaction cost analysis for both portfolios and single stocks. It analyzes trader performance, algorithm performance and strategy performance over daily, monthly and yearly cycles, and views any deviation of realized costs using an array of benchmarks, including algorithm-specific benchmarks.

TQM provides real-time feedback on how broker-supplied algorithms perform versus the arrival price benchmark, Benincasa said.

FlexTrade’s clients find that given certain market conditions and characteristics of stocks in the portfolio, they are better able to identify where to place an order within a broker-supplied suite of algorithms, he said.

“TQM calculates real-time cost based on executions as they occur in FlexTrade,” said Benincasa. “The system runs live while you are trading for up-to-the-minute feedback, enabling you to analyze trades against a multitude of factors.”

FlexTrade’s customer base includes traditional institutional asset managers as well as large hedge funds, program trading desks, and sell-side broker dealers.

Within the institutional investment space, the organizations that have found TCA most beneficial are large asset managers with multicurrency, multicountry, multiday portfolios, said Benincasa. Other big users are broker dealer transition desks managing large, complex transactions, where they need to track costs and provide transparency to clients.

In 2011, 35% of the institutions participating in Greenwich Associates annual U.S. Equity Study said their compliance departments used TCA systems to ensure best execution. Almost 40% said they use TCA systems to assess broker performance on internal trading desks, 38% said they employ TCA to identify outlier or problem trades and 37% said they use TCA to measure active trading results against a benchmark.

Related articles