Buy-side Wants More Out of TCA


Like famed comedian Rodney Dangerfield, TCA gets no respect.

Trade Cost Analysis or TCA is the way buy-side traders attempt to evaluate their performance. But most buy-side traders know that most TCA offerings are either not complete or not high on their priority list as they struggle to meet best execution requirements. In a discussion here at the WBR Equities Leaders Summit in Miami, Florida, several traders and vendors sat down to discuss the evolution of TCA and its future.

Setting the stage for the discussion was the circa 1991 birth of the TCA and how it calculated trade performance.

“What started as simply a check box on our screens has increased in focus and importance these days,” said Michael Clements, Chief Trader, Employees Retirement System of Texas. “We now even use it as a measure towards a trader’s compensation package.”

Liquidmetrix’s Global Head of Sales, Henry Yegerman, explained that at its genesis TCA was simply used by the buy-side to evaluate its brokers. In turn, the sell-side then used TCA to evaluate how their algorithms worked and would fine-tune them based on the results.

Fast forward to now and TCA, while an older measure of performance, is ripe for adjustment and refinement, the panelists agreed. While back in the 1990s there were only a handful of straight line post-trade TCA providers, now there are myriad vendors peddling not just post-trade products but TCA that includes pre- and intra-trade information. And armed with newer products and information isn’t just about knowing how you are performing.

“Not knowing costs money,” said Michael Mollemans, Pavilion Global Markets’ Head of APAC Sales Trading, referring to the danger of not knowing the details of market microstructure and how it impacts routing decisions. “If you want the full picture of TCA and costs, you need to include some qualitative aspects into TCA that cover the entire trading process. You have to be able to anticipate changes in the marketplace.”

“Five years ago we had navigation systems that told you the best way to get you from point A to point B. Today we have Waze, which takes real-time traffic conditions into account when making that recommendation. We see TCA evolving in a very similar manner,” Stino Milito, Co-COO of Dash Financial Technologies added. “TCA doesn’t have to be limited to being inside of an OMS or EMS or those providers – keeping it there really limits your options.”

Liquidmetrix’s Yegerman added that TCA providers such as his firm need to remain flexible in the systems they create and the always evolving market structures. He sees TCA as becoming more thematic in terms of addressing broad themes in the market structure – such as the usage of RFQ exchanges in Europe or Canada’s move towards refining its trade analytics and algorithms.

“TCA is always number four on the buy-sides’ list of priorities, numbers one through three always change and shift,” Yegerman quipped. “But number four always stays the same.”

Employees Retirement System of Texas’s Clements said that he sees TCA usage falling into two groups – clients who use it as a compliance box-checking exercise, and those who use it to help improve decision making and drive performance. And he reiterated he uses it for the latter and not the former.

So, what about artificial intelligence and machine learning? Are they being incorporated into TCA systems of the future?

“The future of TCA is it being able to determine which brokers and algos are suitable at one moment in time and then recalibrating itself for future moments,” Dash’s Milito said. “TCA should recalibrate with every trade and order.”

And while that made sense to the session’s panelists, it has yet to be seen in current market offerings. Liquidmetrix’s Yegerman and Pavilion’s Mollemans said the inclusion of AI or ML remains more hype and marketing hyperbole than anything else.

“We really need now is TCA for blocks. We’re in the markets for that,” Mollemans said. “Now.”

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