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July 6, 2009

Taking TCA's Temperature

By James Ramage

"In addition," the report notes, "some traders would be tempted to game the system to produce results that maximize compensation."

Mark Schlarbaum, Global Capital Mgmt.

They note to the report's authors that the drivers of TCA results aren't always in line with "client goals and shareholder interests." Traders say it wouldn't be good to concentrate on beating benchmarks rather than efficiently implementing investment ideas.

In fact, 23 percent of the respondents say TCA should play no role in trader compensation. At the other end of the spectrum, 20 percent said it should play a "large or extremely large role."

The report concludes by saying that the buyside would get more out of TCA if it were better integrated into the overall investment process. "Doing so will require institutions to include everyone who participates in the investment process into the TCA process," the report says, "and to train them in how to properly interpret and act upon results."

"I'd rather have it"

Schlarbaum agrees, but adds that it could be difficult in practice. In some cases, portfolio managers and trading desks have been working together a specific way for sometimes 20 years. "You've gotten into the habit of doing things a certain way," he says, "and it's very difficult to change those ways."

Stepping back from the survey, Bennett told Traders Magazine that traders are torn on a variety of issues relating to TCA. They accept the regulatory and fiduciary responsibility to demonstrate best execution. But they also reject any notion that they didn't live up to a model's expectation, he adds.

Bennett says that it is also difficult today for a buyside shop to determine how aggressively to apply a system that doesn't deliver "perfect information" in real time. However, he also offers an assessment of TCA.

"If I were running a buyside trading desk, would I rather have it or not have it?" he asks. "I'd rather have it."


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