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November 11, 2008

Traders Magazine Survey: Expect More TCA in the Future

Sellside to see greater TCA scrutiny

By Michael Scotti

Also in this article

Trade cost analysis appears to be gaining steam, according to a recent survey of the buyside conducted by Traders Magazine. Exactly 41 percent of the money managers who responded said TCA will play a greater role in their broker vote and broker selection over the next 12 months.

The largest managers in the survey-firms with more than $100 billion in equities-said measuring brokers trading costs will take on greater significance over the next year. Half of them said their TCA findings will take on a play a bigger part in their broker relationships-both in the broker vote and broker selection process. (See survey at bottom of page.)

Interestingly, the percentage of traditional managers and hedge funds holding similar views was close: 42 percent of the traditional managers said TCA would be a factor in their broker vote and selection in the next year,

while 40 percent of hedge funds were also in that camp.

One knowledgeable source suggested that the survey's results show that TCA could be used as a wedge to push certain non-favored brokers' trading desks into client commission arrangements-a way to pay brokers' research with a check instead of with commissions. TCA could be the deciding factor, the source said, when the desk wants to make its case to management about its trading partners, and also when there's a tug of war between the desk and portfolio managers about who to pay with commissions.

Still, the buyside has a range of opinions about measuring trading costs. The survey asked how trade cost analysis currently figures into managers' thinking. Just over a third, or 35 percent, of the survey respondents said that TCA is "not a factor" today in their firm's broker vote and broker selection. Trade cost measurement today, however, does play an "informal" role in the broker vote and broker selection process for about half of those surveyed. Exactly 44 percent said that TCA has a role in their broker vote and selection, but it is "not quantified" in the voting. Still, 21 percent are big believers in TCA. They put their full faith and trust behind numbers that trade cost analysis provides. One fifth of the respondents said TCA is "an important and quantifiable factor" in their broker vote and selection.

The anonymous electronic survey was sent earlier this month to 2,500 money managers. One hundred firms responded to the survey, yielding a 4 percent response rate. Sixty-five percent of the responses came from traditional managers; 29 percent from hedge funds and 6 percent from hedge funds or endowments.

Half the firms who responded manage less than $3 billion in equities. The rest of the respondents included firms managing $3 to $10 billion (16 percent); $10 to $25 billion (15 percent); $25 to $100 billion (10 percent); and greater than $100 billion (9 percent).

See Buyside Survey