From Securities Technology Monitor
March 8, 2010, Alexa Jaworski

Transaction cost analysis, better known by its abbreviation, TCA, has become a big challenge to trading desks. Done right, a firm gets greater efficiencies in its operations, by figuring out just what market data and other services it really needs. And in the end, controls trading costs and gets the best execution of trades at the same time.

Which is why TCA became a big topic of discussion at last month’s TradeTech conference in New York City. During a panel titled “Exploring the Future Use of TCA As It Becomes More Heavily In Demand,” industry experts discussed challenges of TCA and how financial services firms can better address them.

Among those is the need for more data, consolidated data – and ways to bridge communication gaps between traders, portfolio managers and service providers.

When it comes to TCA, there are market data challenges, noted panelist Linda Giordano, a product manager for Bloomberg who handles product development at Bloomberg trading analytics team and specializes in TCA. Without the right data and an understanding of what venues are being used by brokers, it’s hard to analyze transaction costs.

“In Europe, the need for a consolidated ticker, or the need to be able to evaluate [market data] versus the different venues is something I heard everyone talk about,’’ Giordano said. “This need for venue transparency, something to effectively evaluate brokers, you really need to have more information and transparency… You can come up with the number, but they are not necessarily as meaningful as they could be.”

Michael Caffi, vice president and manager of global TCA services and equity trading at State Street Global Advisors, said some understanding of informational needs by different parties is key.

“One of the things we’re trying to do is bridge that communication gap between trader, portfolio manager and vetting ourselves more in the process,” he said. “We’ve made a lot of progress with that.”

“I think that when you’re starting to look at TCA or even if you’ve been doing it for a while, keeping in mind that you need to keep building that data set” is important, said  Giordano.

Throughout the panel presentation, moderated by Jon Fatica, managing director, post trade analytics at Investment Technology Group, audience members were asked to respond to a series of questions about their firms’ usage of TCA.

In response to the first question, “What elements of TCA do you consider key to pursuing ‘Best Execution’?,” 82% of respondents said “feedback mechanism for trading effectiveness under various market conditions.”

“Best execution in a lot of people’s minds equates to TCA and I think we all know at this point that that’s really not true,” said Caffi. “Best execution is a fairly substantial policy that has been developed at State Street, and TCA is really a small portion of that.”

Another continuing challenge is incorporating TCA into the overall portfolio management process, said panelist Nitin Gambhir, CEO of Tethys Technology, a financial software development and market-microstructure research company. “This includes including the expected cost of risk of executing a position and then driving it to the end,” he said.

The second question posed to the audience, “Is TCA information shared internally or within clients?” 71% responded “two or more of the above,” with the choices being upward in your organization (CIO/CEO/Internal Oversight Committee), portfolio managers, and traders.

“Since we’ve really evolved our TCA model in the last three or four years, we have a virtual ‘lovefest’ between our [portfolio managers] and our traders,” said Caffi.

“We report not only the numbers but every quarter we have had the portfolio managers define how they have their strategies laid out and we go through a grueling for to six weeks every quarter, not only to just put numbers down, but every strategy. We write out trend,’’ he said. When you have these on a regular basis, “the communication is there. There are no surprises.”

In the future, “everything is going to be much more tightly integrated,” said Giordano.

To get to full analysis of costs, data from order management and execution management systems are starting to get integrated more. “As technology provides us the ability to tie all of the data together and come up with real-time estimates, I think this is going to be something that is a lot more automated,”  Giordano said.

The “holy grail,” said Caffi, is to one day be able to communicate to a trader or portfolio manager “why we are seeing things that are happening and how I can help them to change behavior.

“If we could reach that goal in five years, then I’ve done my job,” Caffi said.