Transaction Cost Analysis Raises Its Profile (Strategic Focus)

Date: November 22, 2010
Pages: 35
Price:
US$ 3,995.00
Publisher: Ovum
Report type: Strategic Report
Delivery: E-mail Delivery (PDF)
ID: T76CD468188EN
Leaflet:

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Transaction Cost Analysis Raises Its Profile (Strategic Focus)
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Introduction

TCA technology is increasing in sophistication, moving from being a compliance requirement to a tool to increase operational efficiency in trading. Ovum asks whether the market will be dominated by stand-alone TCA developers or by the OMS/EMS vendors who build it into their platforms.

Features and benefits
  • Identifies all the key players in TCA and describes their product offerings.
  • Discusses the merits of getting TCA from a dedicated player or from a broker.
Highlights

Intra-trade TCA is a management tool, designed to identify outliers on a graph of transaction costs that need to be analyzed further to determine why they were so out of whack with the rest of the trades executed in that security, and whether there is any remedial action to be take to avoid their repetition.

Your key questions answered
  • How much has TCA already begun to loop back to inform algorithmic development work? Which vendors are furthest advanced in this context?
  • When should I consider getting my TCA from my broker or from my market data provider?

SUMMARY

Catalyst
Ovum view
Key messages
TCA is a value-added service for sell-side firms to offer on their execution management system (EMS)
Independent TCA vendors face the challenge of keeping up with brokers
Bloomberg and Reuters will change the TCA landscape
The TCA market is becoming more complex

A BRIEF HISTORY OF TCA

What is transaction cost?
TCA is now developing intra-trade analysis

PHASE ONE: THE EVOLUTION OF COST BENCHMARKS

VWAP was the first benchmark for TCA
Abel/Noser was the first to rise to the challenge
Elkins/McSherry beefs up correlated stock research
GSCS started in post- and now plans intra-trade
Implementation shortfall is the other major approach to benchmarking
Plexus (subsequently acquired by ITG) pioneered implementation shortfall

PHASE TWO: ENTER THE INVESTMENT BANKS

Market data availability and falling database costs change the game
TCA is a value-added service for sell-side firms to offer on their EMS
Independent TCA vendors face the challenge of keeping up with brokers
QSG has recently productized its TCA offering
GTA takes a consultative approach
TAG offers TCA, best execution, and competitive analysis

PHASE THREE: MARKET DATA PROVIDERS JOIN THE FRAY

Bloomberg and Reuters will change the landscape in TCA
Bloomberg ships TCA as part of its EMS but also offers it as a stand-alone
Reuters considers intra-trade for the US market

THERE IS STILL A HEALTHY MARKET IN POST-TRADE TCA

The post-trade TCA market is expanding to boutique brokers

FIRM58 CHAMPIONS EXPLICIT COST TCA

Intense focus on profit margins

THE TECHNOLOGICAL IMPLICATIONS OF EVOLUTION IN TCA

Pre-trade TCA is driven by greater availability of market data
Intra-trade TCA is a paradigm shift in cost and complexity

RECOMMENDATIONS

Recommendations for enterprises
Consider whether post-trade TCA is enough for your requirements
Pre-trade is a useful add-on, provided the infrastructure is fit for purpose
Intra-trade TCA is only for the most demanding participants
Recommendations for vendors
There is an opportunity in post-trade as it moves down market
The business model for new entrants in post-trade will need to be carefully chosen
Pre-trade is a relatively easy next step, though there are infrastructure implications
Opportunity in intra-trade is smaller, but potentially highly rewarding
Alternative views

APPENDIX

Ask the analyst
Definitions
Algorithmic trading
Execution management systems
Implementation shortfall
MiFID
Order management system (OMS)
RegNMS
Volume-Weighted Average Price (VWAP)
Further reading
Methodology
Disclaimer
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