FREE email newsletters 
ITG's Domowitz Talks TCA
Traders Magazine Online News, May 25, 2009
Ian Domowitz, a former finance professor, is considered an expert and among the most recognized names in the business of transaction-cost analysis and quantitative trading strategies. Domowitz is a managing director at agency broker Investment Technology Group (ITG). He is also a key contributor to Below the Waterline: Uncover Hidden Transactions Costs Throughout the Investment Process, a book ITG published last week.
Domowitz joined ITG in 2001, where he is responsible for networking as well as analytical and research products. Prior to ITG, Domowitz was a finance professor at Pennsylvania State University. Before that, he held positions at Northwestern University's Kellogg Graduate School of Management, Columbia University, the Commodity Futures Trading Commission, the International Monetary Fund and the World Bank. He recently spoke with senior editor Nina Mehta about some of his latest research, as well as current issues that traders and portfolio managers face regarding trading costs.
Traders Magazine: So are buyside traders doing more transaction cost analysis these days?
Ian Domowitz: Yes, definitely. It's difficult to judge the overall penetration of TCA into the buyside institutional client base, but it is as high as 98 percent for large firms and roughly 88 percent for midsize firms. When times are tough and returns low, the cost of implementation in the market is even more important than it is in bull a market when returns are relatively high and it looks like people are capturing a great deal of alpha.
Ian Domowitz
TM: Are traders changing the way they use TCA as a result of the financial crisis and greater volatility in the market?
Domowitz: We're seeing an evolution that doesn't have anything to do with the financial crisis in and of itself. That evolution is not away from post-trade reporting, but post-trade TCA is becoming more like performance attribution for the trading process. Generally, though, TCA is becoming an analysis of what's going on overall in the investment process. And the demands of that analysis are greater in terms of depth and granularity.
The big movement now is to question how you actually control transaction costs. That can't be answered through post-trade retrospection. You must think actively about the notion of controlling costs at the level of the trading desk. What does pre-trade analysis now look like? What does real-time TCA actually represent? How should you deal with that information? If you're going to reduce transaction costs, you must do that over the course of the order and not just look at the costs from a post-trade perspective.
TM: Is TCA becoming more important earlier in the trading process?
Domowitz: The short answer is yes, but let me back up. There are three phases to controlling transaction costs. The first phase involves what I call lessons from history. These are lessons you can learn in advance that shed color on market you're about to face. For instance, we've had a lot of demand recently for studies that require a fair amount of data--to examine things you can't do on the fly during the trading day. This could be looking at the relative performance of algorithmic trading strategies, on average, in different conditions. Another issue is what it might mean to grab a large piece of liquidity out of a dark pool as you're working a trading strategy.
For more information on related topics, visit the following channels:
