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July 6, 2009

Taking TCA's Temperature

Survey Says Buyside Torn on TCA

By James Ramage

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Despite widespread usage, the buyside has mixed feelings about transaction-cost analysis and its effectiveness. A Greenwich Associates report on transaction-cost analysis, or TCA, released last month outlines its benefits, shortcomings and how firms are using TCA. Greenwich based its report on a survey of 104 buyside institutions it conducted between May 4 and May 9.

Jon Wilcox, Munder Capital Mgmt.

One unexpected finding, according to the report, shows that 19 percent of the survey sampling does not use TCA to measure its trading costs. "We were surprised to see such a large proportion of institutions not using TCA, in light of its importance from an ERISA and regulatory perspective," says John Feng, a Greenwich consultant who worked on the report.

Little or No Role

The Greenwich study shows that 80 percent of those institutions surveyed use some form of TCA--the tool asset managers use to measure how their trading desks perform in their equity trading operations. But TCA's ability to help generate additional returns to investors strongly divides the survey respondents.

"When it comes to the question of how important TCA is in determining investment results," says Jay Bennett, a Greenwich consultant who also worked on the study, "35 percent say TCA plays little to no role, and an equal share say TCA is very important or extremely important."

TCA is designed to measure how well an asset manager's order was executed, according to a specific benchmark the firm sets. It measures how well the order was executed whether done so ultimately by the buyside trader, the sellside trader or a combination of both.

For the most part, the buyside sees the benefits of TCA when it comes to measuring their own desks and for compliance. But 12 percent reported that TCA adds "little" value in either area.

The report notes that the need to understand and rein in trading costs has risen in recent years, as the buyside has taken greater control of its orders with electronic trading tools. These factors have put a spotlight on TCA, which is the only option right now to measure trading costs and help to better understand the trading process. Overall, the study says traders see "potential" in TCA, but it currently has some weaknesses and needs improvement.

Traders are "generally" pleased with their TCA systems. But even here there are divisions. Exactly 43 percent of those surveyed say their systems are "very effective or extremely effective," 31 percent say their systems are "moderately effective" at measuring the desk, and about 25 percent reported that their systems are "somewhat or not at all effective."

TCA has been around since the 1980s. It uses analytics and a benchmark process, including standards such as implementation shortfall or volume-weighted average price, to attempt to measure how successful traders are at achieving the best results. 


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