TCA Across Asset Classes : Sam Shaw



Best Execution looks at how asset managers are developing their own tools.

Multi-faceted regulatory pressure combined with heightened competitiveness is prompting the buyside to look further afield for its transaction cost analysis (TCA). However, in some cases, looking ‘further’ actually means looking inward, as asset managers are honing their own solutions.

Pure reliance on the sellside could beg questions over an asset manager’s credibility as well as become more onerous at a time when TCA needs to be more prevalent, detailed, accurate and immediate. The need for real-time instruction and analysis form the backbone of this argument, although in a more complex landscape, blended solutions may be a better route as the landscape changes.

There is no doubt TCA is evolving. Put simply, what was once pre-trade analysis of what might happen, used retrospectively by compliance departments is morphing into a real-time, dynamic process of trade monitoring with an impact on trading behaviour, consequently informing better judgments, or such is the view of Simon Maugham, head of operations at OTAS Technologies.

Creating the analysis to do this effectively though is both time-consuming and expensive and to date, neither buy nor sellside firms have led the charge. Yossi Brandes, formerly EMEA managing director, ITG Analytics explains, “The asset managers are looking for third parties because it is harder to aggregate and standardise across 15 different brokers, methodologies and datasets – it is a nightmare to compare otherwise. The TCA vendors offer a form of standardisation across brokers, from an independent perspective.”

As well as the practicalities, there is a fairness argument for introducing an independent view. Despite the FCA’s recent thematic review on best execution focusing on sellside obligations, it highlights the need for all parties to take greater responsibility to ensure optimum trading conditions, with MiFID II and its various aspects a key driver.

According to the Investment Association, a trend is emerging of asset managers hiring dedicated personnel acting as liaison between TCA vendors, sellside and internal stakeholders, demonstrating the fund manager’s commitment to the cause.

The trade body notes that greater emphasis on TCA means asset managers are not only more focused on achieving best execution but are demonstrating to clients they are enforcing a policy that is signed off by senior management, effectively monitored and backed by supporting data.

Sabine Toulson, managing director at LiquidMetrix, says regulation has propelled impartiality up the buyside’s list of priorities. “In the last year and a half we have been approached far more by the buyside, which has been more interested in independent analysis,” she adds. “They want to be able to compare their brokers in a more standardised way rather than getting individual reports, which may not contain the same benchmarks and cannot be compared on a like-for-like basis.”

While a broker report might provide in-depth examination of trading activity, it only offers a single perspective. LiquidMetrix notes the growing penetration of its reports across the buyside allow an interrogation of all the brokers, their chosen venues, algorithms and performance comparison.

While MiFID and the FCA can be blamed – or rather, thanked – for shining their light, the media also has a role to play, according to Toulson.

She says the publication of the Michael Lewis book ‘Flash Boys’ and stories around high frequency trading as well as arguments over venue toxicity, and coverage of the various dark pools under investigation in the US have collectively driven TCA up the agenda.

Beyond equities

As the industry shifts away from just high-level TCA measures around order routing, implementation shortfall, volume-weighted average price (VWAP) and post-order price reversion towards more granularity, MiFID II is also expanding its reach beyond equities.

Fund managers are happy with the broader view. For example, while Investec Asset Management recognises the maturity of equity market TCA, drawing on a broad church of benchmarks and analytics, Mark Denny, its head of dealing, global markets sees the need for “meaningful execution analysis across all asset classes”.

Denny adds that while foreign exchange TCA may now be established in the major currencies, it is not the case in the emerging markets space, which holds greater importance for the South African based fund manager. Further, as bond TCA progresses in the more liquid and regularly traded markets he says it also struggles to find relevant benchmarks in less liquid instruments.

At BNY Mellon subsidiary Newton, head of dealing Tony Russell is also keen to branch out and says he has been working with long-term TCA provider ITG to roll out FX this year, with fixed income capability to follow. However, he concedes data accuracy and availability is difficult.

“We need to get to the point where the fixed income data gives a true representation of the marketplace but at the moment there is not enough data and it is not clean enough. It is a challenge for a number of reasons – liquidity is an issue as well as price transparency – the investment banks hold less than 10% of the liquidity in the market, which is why there are huge calls for buyside to buyside trading platforms to aid clearer price formation, to help improve transparency and liquidity.”

Counting the costs

While the explicit costs – commissions, counterparty trade novation data, data around venues – can be sought externally, implicit and opportunity costs are harder to measure. As such, asset managers might be better conducting some, if not all, of their TCA internally.

Robert Henry, director at GFT says more common is the bifurcation of solutions – combining the critical information found internally and externally. “It is very hard for them to assess opportunity costs – the time between the fund manager’s decision to trade and executing that trade comes at a cost that needs to be assessed.”

He believes there is value in both options. “While the widely held view is that third parties provide the best chance for independent analysis of trades, the issue is they cannot provide pre-trade or real-time intraday market activity that is critical for TCA.”

Kames Capital’s head of investment trading Adrian Fitzpatrick goes even further, saying external TCA is too backward looking. He has turned away from third-party TCA altogether, favouring proprietary tools such as execution management systems, which negate the need for external provision and improve the real-time capability.

“At Kames we no longer take third-party TCA because we utilise other metrics including our EMS to monitor trades as we are actually trading them,” he adds. “If I do a trade and it is incorrect I can see if a broker is trading it today, so if I give various parameters, such as I want to be 15% of the volume and they are only 5%, I can get them to adjust it to make sure they are in line with my instructions.”

Ultimately the primary objective of using TCA is to ascertain the impact of various trading practices on investment returns, and asset managers – especially the ones delivering quantitative strategies – are increasingly well-informed. More data, plugged into independent analysis, and used to complement the sellside may well create an optimal solution.

“We now see more and more trends into understanding the effect on fund returns; more from quant side fund managers trying to understand the associated costs and what percentage of return is lost due to the implementation of investment ideas,” says Brandes.

“You will never know how much the processes hurt your fund unless you measure it.”

[divider_line]©BestExecution 2015

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