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July 6, 2009

Taking TCA's Temperature

By James Ramage

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The TCA system of choice is from a third party, according to the survey. Roughly two-thirds of the respondents use a third-party vendor. Of this group, about half use ITG and about a quarter employ Abel/Noser. Those using proprietary systems, at 11 percent, and those using broker analytics, 8 percent, comprise the balance of TCA users.

The survey also looks at how the buyside views TCA in relationship to broker performance. One-third of those surveyed report that TCA is "extremely effective" in measuring brokers, one-third say TCA is "moderately effective," and one-third say TCA is "somewhat or not at all effective."

Jon Wilcox, a trader at Munder Capital Management, in Birmingham, Mich., says it is unfair to measure brokers with TCA and not include other factors that go into a trade. These include the time horizon, the stock's liquidity and average daily volume, the stock's momentum, news and general market volatility.

Mark Schlarbaum, director of equity trading at Global Capital Management, in Conshohocken, Pa., agrees. Both say they use ITG's TCA, and use methods other than TCA results to vet their broker lists.

"The brokers who look good in TCA usually are the ones we give the easiest orders to. And the ones who look bad are the ones we give the hardest orders to," Wilcox says. "We know which brokers are doing well and which are not. So we don't use TCA for that."


Knowing the Score

In fact, Munder Capital uses TCA to get a sense of how well its internal investment and trading process works, Wilcox says. They monitor their trading quarter by quarter, rather than daily. "Because if we've just done a trade, we know why we did well or why it did poorly," he says.

The survey polled 68 institutional money managers, 12 hedge funds and a smattering of mutual funds, pensions, endowments and banks in the U.S., Canada and Europe. Those who responded consist largely of traders and head traders, but also include chief investment and chief operating officers, according to the report.

Buyside participants are mostly pleased with the data delivery systems, data and consulting services of their TCA providers, the report says. Still, Greenwich compiled a list of areas that could be improved. They include:


* TCA systems should provide faster and "real-time" data.

* TCA should adjust for changing conditions across the life of an order.

* The systems should cover more asset classes.

* They need to involve data from trading sources beyond the primary markets.

* They need to do a better job of showing how outliers can skew overall results.


In what is referred to in the study as a "striking finding," many buyside respondents reported that they would change their trading style if TCA became a larger component of trader compensation. Of 73 respondents, 57 percent--or 42--say they would alter their strategies and practices.