Like its equity market counterpart, the fixed-income sector is adopting the trade cost analysis (TCA) process to help its traders achieve better execution and maximize cost savings.
According to a recent report from market consultancy Greenwich Associates, the move towards electronification of the fixed-income market, plus new complexities in trading, have prodded traders and institutions to take a better look at how they execute orders. That’s one of the key findings of the new report, “Fixed-Income Transaction Cost Analysis Continues Strong Growth Trend,” which presents the results of a study in which 88 buyside traders across the globe working on fixed-income trading desks were interviewed.
More than one-third (33 percent) of these investors now use TCA as part of their fixed-income trading process, up from 19 percent just two years ago.
While the fixed income market has long been a telephony market where there’s simply a bid and ask price for securities, quoted as a spread in fractions, it has now developed into a low-touch environment with multiple trading venues. And the buyside, like in equities, is demanding more transparency into its trading.
“As regulations push for greater transparency from the buy side and electronic trading and central clearing move into formerly phone-based markets such as corporate bonds, government bonds and swaps, a more complex analysis will be required to ensure the execution achieved, even if at the best prevailing price,was, in fact, the best choice,” said Kevin McPartland, head of Greenwich Associates market structure and technology research.
So which provider is the beneficiary of this new push for TCA by fixed income traders?
Greenwich Associates study reports that Bloomberg is considered the top provider of fixed-income TCA.
Greenwich noted that the market for fixed-income TCA is roughly split between vendor-provided solutions and internal solutions. And while Bloomberg is tops for the moment, Greenwich expects firms that are TCA leaders in other asset classes, such as ITG and trading platforms such as MarketAxess and Tradeweb?to innovate in fixed income in coming months.
“This is a market ripe for competition, as economic and regulatory factors continue to drive investors to integrate TCA into their investment process,” said Kevin Kozlowski, analyst at Greenwich.
And the best is yet to come. For those firms who opt to enter or expand their TCA offerings into the fixed-income universe and other asset classes, there will be plenty of clients waiting to use new TCA services and products.
Greenwich Associates expects use of TCA by fixed-income investors to grow similarly in the FX market, with more than half using fixed-income TCA within the next two years. While it seems unlikely that either fixed-income or forex TCA will reach levels of adoption seen in the exchanged-traded equities markets, the increasingly electronic nature of both puts them on similar paths.
“”The wildcard remains central bank policy,” Greenwich wrote. “If rates rise quickly and a few basis points start to matter less, spending money on TCA technology might look less desirable. Nonetheless, investors are more sophisticated than ever and will continue to demand fees are spent intelligently, fueling the continued proliferation of TCA in fixed income.”
