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
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
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.
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
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
