Trade cost analysis appears to be gaining steam, according to a recent survey of the buyside conducted by Traders Magazine. Exactly 41 percent of the money managers who responded said TCA will play a greater role in their broker vote and broker selection over the next 12 months.
The largest managers in the survey-firms with more than $100 billion in equities-said measuring brokers trading costs will take on greater significance over the next year. Half of them said their TCA findings will take on a play a bigger part in their broker relationships-both in the broker vote and broker selection process. (See survey at bottom of page.)
Interestingly, the percentage of traditional managers and hedge funds holding similar views was close: 42 percent of the traditional managers said TCA would be a factor in their broker vote and selection in the next year,
while 40 percent of hedge funds were also in that camp.
One knowledgeable source suggested that the survey’s results show that TCA could be used as a wedge to push certain non-favored brokers’ trading desks into client commission arrangements-a way to pay brokers’ research with a check instead of with commissions. TCA could be the deciding factor, the source said, when the desk wants to make its case to management about its trading partners, and also when there’s a tug of war between the desk and portfolio managers about who to pay with commissions.
Still, the buyside has a range of opinions about measuring trading costs. The survey asked how trade cost analysis currently figures into managers’ thinking. Just over a third, or 35 percent, of the survey respondents said that TCA is “not a factor” today in their firm’s broker vote and broker selection. Trade cost measurement today, however, does play an “informal” role in the broker vote and broker selection process for about half of those surveyed. Exactly 44 percent said that TCA has a role in their broker vote and selection, but it is “not quantified” in the voting. Still, 21 percent are big believers in TCA. They put their full faith and trust behind numbers that trade cost analysis provides. One fifth of the respondents said TCA is “an important and quantifiable factor” in their broker vote and selection.
The anonymous electronic survey was sent earlier this month to 2,500 money managers. One hundred firms responded to the survey, yielding a 4 percent response rate. Sixty-five percent of the responses came from traditional managers; 29 percent from hedge funds and 6 percent from hedge funds or endowments.
Half the firms who responded manage less than $3 billion in equities. The rest of the respondents included firms managing $3 to $10 billion (16 percent); $10 to $25 billion (15 percent); $25 to $100 billion (10 percent); and greater than $100 billion (9 percent).
Overall, the quality of trade cost analysis has improved in recent years, and it should continue to get better, according to Young Kang, global head of algorithmic products at Citi’s electronic trading group. He pointed out that it is much easier today to get accurate market data and execution data than it was just a couple of years ago. “TCA has improved, but it still has a way to go.” TCA needs to do a better job in capturing the costs behind more dynamic electronic trading strategies, he said, compared to VWAP and participation strategies, where it does a good job in capturing trading costs, he said. “Three years from now, we will be very good at this.”
The Quality Goes In …
One question asked respondents to name the products they use for trade-cost measurement. The survey revealed that each firm uses an average of 1.4 products (The question allowed firms using multiple products to mark off more than one system.). ITG products won the popular vote, for being on the most desks, and it also had the most installs on the largest desks.
ITG led the pack: 49 percent of the firms answering the survey use either ITG TCA (35 percent) or its Plexus Group product (14 percent). ITG was used by the most firms in four of the five survey groups, categorized by asset class.
Bloomberg placed second behind ITG as the most used system, getting a 39-percent penetration of those surveyed. Bloomberg, however, was the clear-cut winner in the category for firms with less than $3 billion under management. Two-thirds of the firms using Bloomberg’s TCA product manage less than $3 billion in equities.
The Spend
When it comes to what firms spend on trade-cost analysis, 55 percent of the firms pay less than $25,000 a year. Hedge funds, as a group, showed the least interest in trade-cost analysis. About 70 percent of hedge funds said they spend less than $25,000 to monitor their trades. For traditional managers, 53 percent spend less than $25,000.
At the other end of the spectrum, 15 percent of traditional managers spend more than $100,000 a year with their TCA vendors. Drop the threshold in half, and 32 percent of the traditional managers surveyed spend more than $50,000 on their trade cost measurement. Interesting, about 16 percent of the hedge funds reported that they spend more than $50,000 a year to review their performance.
TCA Lovers
One group of questions asked who uses trade-cost analysis data at the firm. Head traders and traders are the main users for both traditional managers and hedge funds. But the survey also brought in areas outside the desk, including compliance and marketing.
For traditional managers, 53 percent of them weighed in that trading-cost information is used in compliance. That is a slightly larger percentage than portfolio managers, with 48 percent of them reviewing TCA data. Also, 27 percent of the traditional managers use their trade-cost measurement in their marketing effort.
Hedge funds, meanwhile, use measurement far less than traditional managers for compliance (15 percent) and marketing (7.5 percent).
What Bonus?
Regarding bonuses, one question asked if TCA figured in as a component in compensation. Exactly 24 percent of all the firms surveyed said it did. But there was a divergence between traditional managers and hedge funds: 13.6 percent of traditional managers figure in TCA for compensation, while 40 percent of the hedge funds surveyed do.
Among portfolio managers, hedge funds also appear to put greater faith in measuring trading costs than do traditional managers For hedge funds, 44 percent said their portfolio managers “support TCA and believe that its results reflect desk quality.” For traditional managers, the result was 33 percent. Consequently, 40 percent of hedge fund managers are indifferent to measuring trading costs and “pay no attention to it.” For traditional managers, that figure was slightly higher at 52 percent.
Trade cost analysis found strong support among portfolio managers at the largest firms. At shops with more than $100 million under management, half of them said their portfolio managers believe that TCA reflects desk quality.
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