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Greenwich TCA Study Shows a Divided Buyside
Survey's surprise is that one in five firms doesn't use TCA
Traders Magazine Online News, June 3, 2009
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 today outlines the benefits, shortcomings and how firms are using TCA. Greenwich based its report on a survey of 104 buyside institutions it conducted last month, between May 4 and May 9.
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," said John Feng, a Greenwich consultant who worked on the report.
The Greenwich study shows that 80 percent of those institutions surveyed use some form of TCA in their equity trading operations. But TCA's ability to help generate additional returns to investors strongly divided the survey respondents.
"When it comes to the question of how important TCA is in determining investment results," said 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."
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 added "little" value in either area.
The report noted 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 said traders see "potential" in TCA, but it currently has some weaknesses and a need for improvement.
Traders were "generally" pleased with their TCA systems. But even here there were divisions. Exactly 43 percent of the survey said their systems were "very effective or extremely effective"; 31 percent said their systems were "moderately effective" at measuring the desk; and about 25 percent reported that their systems were "somewhat or not at all effective."
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. The balance of TCA users is comprised of those using proprietary systems, 11 percent, and those using broker analytics, 8 percent.
The survey also looked at how the buyside views TCA in relationship to broker performance. One-third of the survey reported that TCA was "extremely effective" in measuring brokers; one-third said TCA was "moderately effective"; and one-third said TCA was "somewhat or not at all effective."
One hedge fund trader quoted in the report said that it is unfair to measure brokers with TCA and not include other factors that go into a trade. "Every trader knows you give your toughest orders to your best [sellside] traders, but these traders will inevitably be penalized if judged solely on TCA," he said.
The survey was made up of 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 consisted largely of traders and head traders, but it also included chief investment and chief operating officers, according to the report.
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