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December 13, 2010

TCA is OK But Needs Work

By John D'Antona Jr.

If trade-cost analysis could do more than compliance or give a general tracking of overall desk performance, the buyside would embrace it more. If given a choice, the buyside would want TCA results to contribute toward finding a better trading process that lowers trading costs and improves investment performance, according to a recent Greenwich Associates study.

 

Challenges to Current Use of TCA

 

The latest "Greenwich Market Pulse" reports that institutions are fairly satisfied with their TCA systems and providers. However, the survey results suggest their satisfaction is related mainly to the use of TCA as a tool for basic blocking-and-tackling issues, like compliance and trading desk performance.

Indeed, institutions have expressed "disappointment" and "frustration" with trade-cost analysis' inability to identify opportunities for institutions to improve overall performance by wringing new efficiencies out of the trading process, Greenwich wrote.

According to the study, institutions are not content with the "actionability" of their TCA vendors' analysis--that is TCA's ability to find new efficiencies in the trading process to raise performance. Approximately 30 percent of institutions describe the analysis they receive from their TCA systems as actionable; 20 percent say it is not actionable. The balance of the survey respondents said they were not sure.

Interestingly, only 25 percent of those surveyed said they include TCA results to compute compensation on the trading desk.

Dennis Fox, director of equity trading at Munder Capital Management, said he is content with his TCA system, but he'd like to see additional enhancements that would benefit his trading desk. First, he'd like to have the ability to analyze data better online. Second, he'd also like to see a peer ranking that compares his trades against similar trades done by other traders.

The report focused on inaccurate data as being pitfall to TCA. Peter Weiler, head of sales at TCA vendor Abel/Noser, said TCA is a tool that requires the client to provide an adequate amount of data in order to maximize TCA accuracy. Some order management systems provide adequate data and allow firms to get the most out of their systems, while others do not, he said. "The data we get from clients is getting better and better," Weiler added.

Greenwich conducted its survey from Sept. 27 to Oct. 4, based on interviews with 114 institutions in Europe and the United States. The majority of the firms had at least $3 billion in assets under management and produced a minimum $5 million in annual equity brokerage commissions.

The report broke down of institutions that use TCA by their commission levels. It divided the respondents into four group: All the firms with more than $50 million in annual commissions used TCA; 67 percent of the firms with between $21 million to $50 million in annual commissions used TCA; 57 percent of the firms with between $11 million and $20 million used TCA; and 83 percent of the firms with between $5 million to $10 million in annual commissions used TCA.

 

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