February 28, 2023 | Stamford, CT — A combination of technological innovation and new regulation is prompting U.S. fixed-income investors to use a tool that is a mainstay on buy-side equity trading desks: transaction cost analysis (TCA).
TCA allows investors to measure the effectiveness of their trades and ensure best execution practices. These analytics are widely used in equity markets, where investors have easy access to market data against which to benchmark trade outcomes. Until recently, a lack of reliable data made it difficult, if not impossible, for investors to apply TCA to trades in fixed-income securities. Even in cases where limited data was available, the sheer diversity and complexity of the asset class made it hard to produce meaningful results.
Positive developments in the fixed-income market are changing perceptions and creating opportunities for more analysis. For instance, the migration of fixed-income trading from manual to electronic execution is changing those dynamics and creating opportunities for investors to assess trade outcomes. Today, about half of buy-side firms globally use TCA. Meanwhile, another 15% have plans to adopt it, according to the results of a recent Coalition Greenwich study.
Fixed-income investors that have not adopted TCA say they still lack the robust data sets and tools needed for these systems to function effectively—especially in less-liquid instruments.
“Ironically, data right now is both the main the driver and inhibiter of TCA adoption,” says Audrey Blater, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Fixed-Income TCA Adoption: What Can We Expect Going Forward.
The use of TCA in fixed income could expand rapidly in coming months as the SEC pushes forward with Regulation Best Execution, a set of rules that would require sell-side firms to ensure they are acting in the best interest of their clients. The shift to electronic trading has already produced a wave of new data that investors are accessing through pricing streams via vendor solutions and order management systems, and direct from the dealers themselves. In the future, investors will integrate new best execution data into that mix, creating what should be a more robust foundation for TCA analysis.
Quant Skills and Analytic Tools are Transforming Fixed-Income Trading
Another important factor that could accelerate the spread of TCA in fixed-income markets is the increased presence of quantitative skills on trading desks. In addition to hiring data and analytic talent, about 56% of the buy-side firms taking part in the Coalition Greenwich study provide staff with education tied to data analysis and methods.
“The front office is investing in staff with data science backgrounds and advanced analytical methods—a combination that is transforming how fixed-income trading desks operate,” says Audrey Blater.
Fixed-Income TCA Adoption: What Can We Expect Going Forward analyzes the use of pre- and post-trade TCA in fixed income, including the types of systems now employed, the most in-demand TCA applications, and the most popular providers of TCA systems and data. The report also examines the forces that will drive TCA’s evolution in the future, including regulation, technology innovation, improved and expanded data sets, and the growing use of algorithmic trading in fixed-income markets.