Transaction-cost analysis (TCA) is not a new business process that needs to be managed by capital markets firms. If anything, it might even be considered to be a bit dreary and frumpy.
But as buy-side and sell-side firms grapple with ever more onerous and complex regulatory mandates, while similarly trying to provide their clients with greater transparency into how and why they acted the way they did on their behalf, TCA has become one of the primary means of achieving these aims. FIS, which follows IHS Markit (2016) and ITG (2014 and 2015), wins this year’s TCA category thanks to its AlphaZoom TCA platform, an offering designed to provide buy-side and sell-side users with the wherewithal to assess their trade executions for equities and FX.
According to Mike Schutt, SVP, US trading and networks at FIS, regulatory mandates and compliance obligations are the primary drivers spurring capital markets firms’ use of increasingly sophisticated TCA tools. “Regulatory and compliance [mandates] such as Mifid II are driving firms to need TCA,” Schutt explains. “They are required to have a better understanding of their trading partners from a best-execution standpoint. TCA solutions allow buy-side firms to see where and the capacity their brokers acted on their trades, allowing them to measure the quality of their executions. In addition, trades are compared to industry benchmarks allowing them to compare brokers against each other to see who is performing best, and then allocating more trades to the best [performing] brokers.”
According to Schutt, quantifying market impact and venue information (where firms trade) requires vast quantities of data, one aspect of TCA that all but the very largest capital markets firms struggle with. “The data is generally not in a similar format across OMS/EMS providers, therefore it requires a great deal of time to normalize in order to do the analysis. Understanding the complexity of the data is also important: With any given benchmark, there are pitfalls one can fall into if you don’t look at the data within the proper context. Our TCA consultants work with clients to understand the numbers, fully utilizing the information to trade better.”
As for enhancements to the platform scheduled to be unveiled sometime this year, support for fixed-income instruments is by far the most noteworthy. “Clients can also leverage the SGN [the SunGard Global Network that connects buy-side firms, sell-side firms, exchanges and ECNs] to have their trades automatically reported to the FIS AlphaZoom platform, allowing them to be completely ‘hands-free’ in terms of needing to touch the data to generate a report,” Schutt says.
While at Sibos Toronto, James shares some interviews covering topics on blockchain, fintechs and cybersecurity.Subscribe to Weekly Wrap emails