Institutions Look To Transaction Cost Analysis to Improve Investment Returns

Over 90% percent of equity trading desks actively use transaction cost analysis (TCA) to measure trade effectiveness, identify outliers and to meet reporting and oversight requirements, but leveraging TCA as a real-time source of alpha remains the holy grail.

A new report from Greenwich Associates, Equity TCA: Drive Toward Alpha Generation Continues, highlights the increasing focus of the buy side to leverage TCA for alpha generation.   “A combination of market structure changes and technology innovations are changing investors’ perceptions, and realities, for how TCA can be used,” says John Colon, Managing Director of Greenwich Associates Market Structure and Technology practice.  The report findings are based on a recently completed study with 199 buy-side traders around the world.

Nearly 50% of equity desks globally now use TCA as both a pre- and post-trade tool with one-quarter using TCA for real-time, in-trade analytics. Due to their access to the resources for deploying and integrating new technology, the highest-volume firms are the biggest users.

TCA as Alpha Generator
Regulators’ push to increase transparency and the explicit separation of execution from payment for research will reduce the role of research as a tie-breaker where brokers’ execution capabilities are essentially equivalent.  Market conditions, including the low interest-rate environment and global regulatory reform, will drive continued investment in TCA and enhance the role of TCA performance as a differentiator.

“Greater reliance on TCA as a source of alpha requires ongoing improvements in data sets, analytical tools and systems integration,” says Kevin Kozlowski, Greenwich Associates Institutional Analyst, specializing in global securities and trading.  “The result is greater comparability across individual trades and a better understanding of the performance impacts of an institution’s policies and practices.”

Third-party Technology Providers
Nearly three-quarters of investors look to third-party providers for TCA solutions. The most frequently used providers have changed little over the past several years and include ITG, which is used by 38% of study participants, Bloomberg BTCA, Abel Noser, and Instinet.