Asset Managers Expand TCA Use: Survey

Asset managers are increasingly using transaction cost analysis (TCA) to drive insights beyond traditional uses as well as expanding the scope of asset classes covered, according to a new report from Acuiti.

In order to better understand how asset managers are adapting their approaches to TCA, Acuiti partnered with Trading Technologies’ Abel Noser Solutions, a TCA services provider, to conduct a study into how firms are evolving their strategies. The whitepaper, The Growing Sophistication of Transaction Cost Analysis, is based on a survey of senior executives at 64 asset management firms.

Acuiti says that over the past decade, approaches to TCA have evolved from a simple measurement focused on basic metrics such as commissions and spreads to a holistic view across multiple metrics, including market impact and a broader range of inputs. On this, the study found that 65% of respondents to the survey had increased the sophistication of their analysis of TCA data over the past five years.

Use cases for TCA have also proliferated in recent years with applications now including risk management, alpha creation and marketing to investors in addition to more traditional use cases, such as internal compliance and decision making on broker selection.

The survey also found that asset managers are also taking a more sophisticated approach to how TCA is embedded within their workflows. This is, however, an ongoing process for firms, it warns, adding that, for example, while 87% of respondents recognised the importance of integrating TCA into their OMS/EMS, less than half currently had that functionality.

Challenges still remain for firms, Acuiti says, with 94% reporting that poor data quality hampering their ability to effectively measure TCA. Other major challenges firms faced were seen most in measuring liquidity and establishing the market impact of a trade.

As the use cases of TCA increase with the advance of technology solutions to measure and analyse the data, so too do the asset classes that are in scope for TCA. TCA is most mature and widely used in equities, where data availability and standardisation are the most advanced. The survey found, however, that asset managers are increasingly deploying TCA in other asset classes outside equities. Firms taking part in the study said they commonly applied TCA to fixed income and equity derivatives. Less commonly, respondents also applied TCA to commodities and listed and OTC fixed income derivatives.

“The findings in the study correlate with our own experience at Abel Noser and TT in which asset managers and other clients are looking to increase the applications of TCA across both asset classes and the trade lifecycle,” says Peter Weiler, managing director, data & analytics, at TT.

“Over the past decade, TCA has gone from a retrospective, compliance-focused process to one in which valuable insights can be driven across the trade workflow,” adds Ross Lancaster, head of research at Acuiti. “As firms find more use cases for TCA, the need for high quality, real-time data also increases, which is causing challenges for some firms. However, for the firms that can achieve data quality across asset classes, there is significant value to be gained both in terms of trade optimisation as well as in alpha generation.”