Kicking off a series of digital discussions, I recently caught up with a select group of Finance Hive members – global/regional head traders and trading technology leads from buy side firms with combined AUM of over $8 trillion – to facilitate a safe space for them to discuss how their firms can ensure they’re making the most of the TCA providers available to them, and what they can be doing in-house to plug some of the gaps.
It also offered an opportunity to get a true lay of the land when it came to TCA provider performance. Below I’ve highlighted some of the themes we touched on and the key takeaways (email me here if you’d like to read the full report).
– Jack Haddon, Finance Hive Editor
How is your TCA set up at the moment?
Some of the larger buy side firms were keeping all of their analysis in house as they believed they could do a better job of analysing their own flow than any third parties. Those using third parties were largely dissatisfied with the value-add insights and consultative service they were able to provide. Third-party solutions being used by the group were denounced as “tick-box.” One member mentioned they’d recently switched TCA Providers and during their RFP process discovered that most of the main players were quite similar.
What are your biggest pain points around TCA?
The woes expressed by the group where TCA were quite varied and included:
- Third-party providers not delivering on roadmaps
- ETDs being neglected by providers and the quality of the data being poor.
- Lack of a solution that can analyse small cap stocks well
- Lack of differentiation between providers makes it hard to justify a switch
- Too many reports!
- Understanding the data you get back from providers
- Lack of information on how to improve trading
- Lack of customisation is frustrating
- Some providers are focused more on brokers than buy side
How can you plug the gaps?
Although dissatisfied with the lengths that third-party providers could go to in order to help them improve the quality of their execution, the group had numerous ideas on initiatives that would help them to draw some value-add out of their TCA, including the two below:
Use Multiple Benchmarks
It was agreed that using multiple benchmarks was a good way of improving performance using TCA and there was a general consensus that using one benchmark doesn’t really work (especially true in the small-cap space). Using multiple benchmarks was also cited as being helpful in demonstrating performance to compliance and end-investors. You can use the insights you get from measuring against multiple benchmarks to pick up on patterns and see if you should change the way you are executing certain orders.
Utilise in-house execution analysts (IF you can afford it!)
The larger firms present had dedicated resources to fund a team of execution analysts who were responsible for systematically analysing trading performance and monitoring internal TCA systems to make sure they pick up on flags changing. The buy side firms in the boardroom who were working with these teams suggested that they propose their own projects and gave them a level of autonomy over what they were analysing to keep them engaged and challenge pre-existing bias on the trading desk.
What’s been your key takeaway from this discussion?
I’ve highlighted a selection from the group here:
- Everyone is at different stages in their trade analytic journey but are we all trying to achieve the same goal, albeit with different budgets and resources
- Make sure to look at some of the smaller providers – they may have the functionality and flexibility to fit into your workflow where the bigger names may not
- Keep your in-house tools in check by validating against external providers
- Consider PM profiling as it seems like a quick win to get some value-add out of your TCA
- Think about why you are doing TCA and what output you want
- The idea of one TCA for clients and compliance and one TCA for traders is interesting, and something we had never considered
Hopefully this has given you a flavour of the discussion, to read the full report please email me directly: firstname.lastname@example.org