To Evaluate Traders, Routing, Buy Side Wants Better TCA
Investment firms seeking more detailed information from providers
May 4, 2009
The market volatility seen throughout the financial crisis has made transaction cost analysis more difficult, since the analyses depend on historical data. But that hasn't stopped buy-side firms from demanding that the tools provide more information.
"Getting trading right is a competitive edge and a key creation of value along the chain--you can lose a lot of money if you don't get it right," said Christoph Mast, head of global trading at Allianz Global Investors subsidiary RCM, at the TradeTech conference in Paris last month. An integral part of the process is using transaction cost analysis (TCA) to find portfolio managers who are following the crowd and traders who are missing opportunities.
Not only do firms need TCA to find out how much it costs to do a trade, said Mast in an interview, but they need better tools to evaluate their staff.
With the introduction of electronic trading, the role of the buy-side trading desk has changed, said Klaus Timpel, global head of valuation control at Deutsche Asset Management. Timpel said he sees the trading desk's value in requests for proposals asking about the firm's processes and trading policies.
Trading desks say that the outliers on execution costs are often the result of poor decisions and timing by portfolio managers and they want TCA tools that can prove it. "Ninety percent of the outliers on trading are made by the portfolio manager, because he has more impact on our trading process," said Nigel Coleman, head of U.K. equity trading at Credit Suisse's asset management arm. "The use of TCA should be to show the portfolio manager the cost of his trading style compared to the man sitting next to him."
Before buy-side firms had access to TCA reports, the sell-side took advantage of them, said Timpel. "If you let a portfolio manager trade, that still happens," he asserted. Trading desks "have a skill and add value to the process, but it is a tough sell because you are coming out of a cost-center approach. The portfolio manager only sees an investment opportunity" and doesn't care whether the firm's systems can trade and process it.
Most portfolio managers have never traded, added Timpel, or did it so long ago that they have forgotten how. Yet, as Coleman noted, it is hard to figure out how to pay a trader when his success, or failure, depends on ideas and timing that come from the portfolio manager.
The answer, according to Mast, is TCA that uses good models and better data. "We need it to replace stupid discussions with a portfolio manager who made the wrong decision or waited too long."
Betsy Anderson, head of centralized dealing at Ignis Asset Management in Chelmsford, U.K., said her firm is using TCA to improve portfolio manager's decisions. "We highlighted some portfolio managers who are very momentum-driven, but without the data they don't see that. TCA can be used as a tool to surface issues like fund manager panic."
Internal review of trading patterns is a good use of the TCA information currently available, such as the tradeoff between delay and impact, said Michael Sparkes, managing consultant for analytical products at agency brokerage Investment Technology Group (ITG), which acquired TCA provider Plexus Group in 2006.
