While Best Execution and Transaction Cost Analysis (TCA) are well-established in equity trading, other asset classes have been slower to adopt such techniques due to limitations in market data and market structure characteristics. In Over-thecounter (OTC) markets there has typically been no requirement for central reporting, making it difficult to demonstrate best execution in the same way as for equities. This is beginning to change due to pressure from regulators and end investors who require higher standards of information. Market structure changes, with more electronic platforms taking increasing shares of trading, are also enabling more precise analysis. Over the last three or four years, Foreign Exchange (FX) TCA has become increasingly mainstream for asset managers, while one recent survey shows that in the past year, Fixed Income TCA has become the fastest growing category of analysis1. These trends are expected to continue, not least in the light of MiFID II regulations.
“The most valuable commodity I know of is information” – to quote Gordon Gekko from the 1987 movie classic Wall Street. This line has never been more significant than in today’s data-fuelled financial markets, where detailed analysis of information can provide that all important competitive edge – both now and in the future. To achieve this, firms are looking towards Transaction Cost Analysis (TCA), which enables them to reduce costs and hone trading strategies.
TCA providers must communicate better, but they need help from their constituents. To this end, we applaud the efforts of FIX Protocol groups, led by Mike Caffi of State Street Global Advisors and Mike Napper, from Credit Suisse. They recognize concerns that inconsistency in TCA terminology across providers presents practitioners with challenges. A consolidated glossary is being developed, and as of this writing, groups devoted to TCA for FX, for Fixed Income, and for futures/listed options are being created.
Final Results as of 7/17/2013
The developed markets outside of Asia finished 2012 with yet another month of trade outflow while Asian developed markets saw another month of trade inflow, making December 2012 the third consecutive month. The financial sector in both the developed markets and emerging markets saw significant trade inflow. Trade costs decreased in both the developed and emerging markets from November.
In this interview from the Winter 2012/13 issue of Best Execution magazine, Jim Cochrane talks about the challenges of achieving best execution in the FX market.
In November 2012, MSCI World Index and MSCI North America indices continue to
experience trade outflow, althought not to the level of magnitude in September
2012. Similar to October, Asian regions continue to see trade inflow. Regional
emerging markets experienced trade outflow. Resources sectors of MSCI World and MSCI North America indices saw significant trade outflow. For the regional emerging markets, information technology sector saw trade outflow. Trade costs decreased in both the developed and emerging markets from October.
In October 2012, MSCI World Index and MSCI North America indices continue to experience trade outflow, although not to the level of magnitude in September 2012. Regional emerging markets also experienced trade outflow. Financial and health sectors of MSCI World and MSCI North America indices saw trade inflow. For the regional emerging markets, basic material sector saw trade inflow. Trade costs increased in both the developed and emerging markets from September.