Equity post-trade transaction cost analysis (TCA) usage among U.S. and European firms will reach nearly 90 percent by 2009, with 38 percent of those firms examining TCA on a daily basis, according to a study released by the TABB Group. Nearly two-thirds of U.S. and European equity firms now spend over $100,000 a year on TCA and larger firms, when including internal development costs, now spend annually on average $200,000.

Moving outside the cash equities marketplace, TABB Group says 58% of U.S. buy-side FX traders have already attempted to measure execution quality and transaction costs. Similarly, 25% of equity options traders now use an internal model to track their execution quality and transaction costs.

Across US and Europe, TCA deployment is closing quickly in on ubiquity, explains Adam Sussman, TABB Group’s director of research. “Its usage is far more widespread than other oft-cited components of modern day trading like algorithms, execution management systems and crossing networks because the desire to measure performance cuts across nearly all trading styles, investment strategies, geographies and even asset classes. Today, it really doesn’t matter if you’re a trillion-dollar, quantitative mega-manager or a classic, bottoms-up stock picker with $50 billion in assets. Both scrutinize their post-trade TCA at least once a week.”

Sussman also points out that “the desire to measure is no longer a trend but a full-blown staple of asset management -- and the story’s only just begun.”

While regulation and transparency are the keys to enabling more precise execution measurement, Sussman says, the benefits of TCA are still contested. Nearly a quarter of those interviewed see volatility as the main driver of unavoidable transaction cost, while others cite order size and a stock’s liquidity. The question is no longer whether there should be TCA on the trading desk, but how it is incorporated into the process.

Addressing Europe’s markets, he adds, “The small number of traders still free from TCA’s impact is dwindling as MiFID exerts its influence. However, at the same time as usage spikes, we expect European TCA will become more accurate as reporting requirements force more trade information into the public domain. But the changes in how execution quality is measured hardly ends there, with the entire European market microstructure about to undergo a sea change as new execution venues threaten to fragment liquidity and introduce new business models requiring traders to revisit trading strategies and costs.”

Other key findings include:

• early 75% of firms evaluate traders against TCA, while others believe measuring individual traders is “a slippery slope to a mercenary environment that discourages teamwork.”
• Nearly 25% of equity trading firms believe TCA should be used as part of compensation for traders. Among firms already using TCA-based compensation, up to 20% of bonuses are based on TCA; nearly 80% are opposed to the idea.
• 37% of US equity traders attribute decreasing transaction costs to better tools and market data.
• Regulatory interest is increasing concerning equity options with the SEC announcing recently a program to pursue quarterly execution reporting similar to what occurs in equity markets.

About this study

The TABB Group study, “Imperfect Knowledge: International Perspectives on Transaction Cost Analysis,” focuses on how the buy-side views post-trade and pre-trade TCA, including how frequently it is reviewed, the different benchmarks traders are measured against it, how that affects their compensation and impact on portfolio management. It also examines how usage patterns differ in the U.S. compared to different regions of Europe, as well as the viability of TCA in the FX market and other asset classes. TABB Group conducted lengthy interviews with 137 buy-side traders, with a slight edge to U.S. equity traders, and 22 FX professionals across different organizations, including investment banks, hedge funds and traditional asset managers.

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