TCA is a process used to determine the cost of executing an order. The authority on this method is Robert Almgren and Neil Chris in their paper “Optimal portfolios from ordering information”, Journal of Risk Fall 2006.
The cost is defined as the difference between the price in the market when the order has started executing through the time when the last share is executed and the order is completed. That value is expressed as Cents-Per-Share (“CPS”). The effect the size of an order has on the market (“Market Impact”) can be mitigated by presenting a limited number of shares at a time based on the number of shares that historically trade at a selected time.
There is a difference between the reporting function of “Execution Performance” versus the predictive nature of traditional pre-trade analysis such as Transaction Cost Analysis (aka “Arrival Price” or “Implementation Shortfall”.
Execution performance takes into account previous execution venue order executions for similar or same instruments. If one venue is found to have executed more shares with less disparity between the execution price and, say, the VWAP for the execution time period then that venue would become the destination of choice. Taking into account all execution venues would require direct data reporting from each execution venue for selected time periods of trading or simply all tick data. The storage and retrieval costs of the data collection can be quite large and may over-shadow the value of execution performance analysis in the first instance.
Utilizing additional information could be more beneficial to the process of smart order routing. Taking into account volume and concentration of IOI’s (Indications of Interest), News Items, commission schedules against costs of capital commitment or as a hedge against pre-existing positions may provide greater insight into the profit potential of potential trading.
Smart order routing may be the stated goal but execution performance is the measure of success.
Simple measures of TCA are
- Volatility- The historical movement of price during the time period targeted for execution
- Participation Volume – The percent of shares of the total order against the historical number of shares traded during the time period targeted for execution
- Cumulative Volume – A display of the accumulated volume acquired over the life of the order
- BPS Risk – A measure of risk dependent upon the amount of time that an order is left in the market to execute that could expose intent that increases market impact
Most of the calculations used are basic math. Value-add comes in the form of “secret sauce” multipliers that smooth data results. The analysis presented does not include any special values however the points at which a customized formulation may be desired are apparent to the advanced trader.
