Equities: Are you making the most of your TCA?

By Niall Coyne & The Finance Hive

I was recently fortunate to attend a buy-side gathering organised by The Finance Hive and one of the subject matters was TCA. An open and candid conversation was had on the various vendors used by the participants and how TCA is used within each firm. It got me thinking when I heard the same comments on the session and in prior conversations with my peers, resourcing is a recurring major issue. TCA invariably draws on a massive set of data whether it be in a low volume or high-volume trading firm. Drilling down to child routes and individual fills for just a single over the day order can present a wall of data that will bring on a headache once you hit it. Not only is the data set large but the interpretation of it is complex. There are a plethora of benchmarks and ways to group the data that can feel like there is an infinite number of permutations in how they are combined and presented.

Niall Coyne, member of The Hive

Any software system that can make sense of the huge trading data set is an amazing piece of engineering. To get the best from these systems, we must combine them with the skills and expertise to navigate them to produce meaningful and accurate conclusions which help drive better outcomes for trading desks. Too often we hear how firms need to fit in the usage of TCA around their already busy working day which has little visibility on how hectic it might be. The TCA systems can be likened to cars and for some are only being taken out for a short stretch with no meaningful conclusion to the trip. Dedicating a resource to these systems will pay dividends in terms of utilising the full functionality of the systems and ensure the exercise has a conclusion. Getting overwhelmed by the data and with no clear goal on what is trying to be achieved can lead to getting more questions than answers and users will tie themselves in knots.

Dedicating a resource to trade oversight (not just TCA) alongside clear and attainable goals will ensure that firms are driving towards their best execution obligations as set by the relevant regulatory bodies. Many a buy-side trader may mumble they are unsure on what their regulator is looking for in terms of TCA and oversight. I do not believe I am speaking out of turn when I say the straight answer you will get from the FCA is to read the 2014 Best Execution Thematic Review. They want to see a feedback loop alongside an adherence and oversight to a firms Best Execution Policy. TCA will form a part of the oversight and controls around best execution. Who uses the TCA system can be a bone of contention, asking traders (who understand TCA fully) is akin to marking your own homework. Giving the task to Compliance is good for healthy challenge as part of the oversight but not all will be able to keep pace with the TLA (three letter acronym) bonanza. Within the FCA Thematic Review TR14/13 they comment about a lack of escalation and remedial action for poor outcomes. Firms need to be very careful about how they treat identified issues, if a trader were to point out to compliance about some sub-optimal outcomes the reaction can be one of two. One is to talk of compensation, breach forms, and further escalation. The other is to discuss within the oversight committee and identify ways to correct for the future and continue monitoring. When a compliance department adopts the former stance, they will create an unhealthy environment for future issues and traders will be less forthcoming to raise their hand in the future. The latter stance will ensure that clients can be confident of attaining the best outcomes on a consistent basis. It will also be a source of confidence for the firm for when they need to discuss this part of their business with outside parties.

The benefits of TCA can vary dependent on the type of firm and their volume of business. Firms with huge volume will have a data set that allows for meaningful results to be gleaned. For many smaller firms, simply doing an outlier report and explaining away why it was not a bad trade is not going to help inform future trading behaviour. Judging brokers using TCA does not tell you when the problem lay with the broker or with the internal dealing team who may have instructed in a sub-optimal way. Properly tagging orders is a solution to this but too often traders are let down by their EMS in this regard. This leads on to how systems can measure multi day/week orders or large blocks. Many users question how much they can get from their TCA system when a large order may be made up of several parent orders as a PM keeps reloading. Some off-system manipulation is often needed to try and make sense of these types of orders.

Dedicating time and resources to TCA is the only way to benefit from the full functionality of the various systems available. But that is only where there is enough data to work with. Where there is not, then a part time or dual role resource may give a firm confidence they are doing the right thing. Firms need to be comfortable that they can only work with the data they have. Large firms will be able to have dedicated resources to manage the massive data set and present helpful findings. Smaller firms simply will not have enough data to warrant a full-time resource or have enough data to draw meaningful conclusions. This could be why we often hear some firms ask what is enough in terms of TCA usage, they simply do not have enough data to attain confidence in the findings.

I likened the TCA systems to cars before and they need to have someone competent in driving them and able to be disciplined enough to not veer off course when exploring the data set. Each objective that can be met using TCA is a different course and not mixing them up is one way to ensure each journey comes to a meaningful conclusion. It is appreciated that many firms will have an excellent setup in terms of TCA usage but many feel like they are not doing enough as they do not wring out all the functions from their systems. But this is like most systems, I doubt many a Bloomberg user is utilising more than 10% of the systems capability. Having a clear explanation for what each firm sees is best execution wrapped by a monitoring and oversight process (of which TCA is a part of) should be enough to stop the inner voices questioning what more can be done.

If you wish to discuss this topic further, please feel free to contact Isabella Grassick, Customer Success Manager for Equities & FX

Any software system that can make sense of the huge trading data set is an amazing piece of engineering. To get the best from these systems, we must combine them with the skills and expertise to navigate them to produce meaningful and accurate conclusions which help drive better outcomes for trading desks.”

The benefits of TCA can vary dependent on the type of firm and their volume of business. Firms with huge volume will have a data set that allows for meaningful results to be gleaned. For many smaller firms, simply doing an outlier report and explaining away why it was not a bad trade is not going to help inform future trading behaviour.”

Dedicating time and resources to TCA is the only way to benefit from the full functionality of the various systems available. But that is only where there is enough data to work with.”

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