Transaction cost analysis is evolving from a compliance tool to become an integral component of the institutional investing process.

The goal of TCA today is to gauge trading and execution performance, and to link the portfolio management and trading desks of institutional investors.

“Although TCA started as a compliance tool, over the past decade it’s been moving to a state where investment managers are using it to improve their trading performance,” Peter Weiler, executive vice president at Abel Noser, told Markets Media. “The role of TCA has become to help investment managers find patterns that allow clients to create riskless alpha.”

In 2011, 35 percent 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 percent said they use TCA systems to assess broker performance on internal trading desks, 38 percent said they employ TCA to identify outlier or problem trades and 37 percent said they use TCA to measure active trading results against a benchmark.

Abel Noser, an independent agency brokerage, offers TCA products through its Ancerno subsidiary. “We’re a pioneer and a leading provider in this space,” said Weiler. “As the technology has become more robust, we’ve greatly expanded our offerings for the buy-side community.”

The essence of TCA lies not only in documenting trading performance, but in eliminating the disconnects that can arise between a portfolio manager and the trading desk.

Ancerno’s Signature Algorithms service plugs this gap by customizing algorithms based on a manager’s historical trading style and pattern. By segregating manager timing from implementation, the service is able to clearly depict how the trading desk is interacting with the timing of manager decisions.

The program begins with a manager’s trading analysis which is compiled from Abel Noser’s database of historical trades and a manager’s trading strategy. The program analyzes the data to determine the best trading strategy for that manager’s investment style. A custom algo is then built from the library of Abel Noser’s proprietary algos that best suits the portfolio manager and trader.

“Anybody can tell you that you’re four basis points off the VSWP, but the real value of TCA is in improving the investment process,” said Weiler “Portfolio managers have an investment process in place, but when orders are placed to buys-side trading desks things can get lost in translation. It’s important for the portfolio manager and trader to be on the same page.”