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Guide to tCAcounting the cost
www.best-execution-world.com
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BTCA Guide 09 covers.indd 1 6/4/09 15:54:59
BestExecutionGuidetoTCA2009 ��
METHoDoLoGy
Before the launch of MiFID, TCA was
mainly cost-oriented. There was only
incipient pre-trade analysis; mainly due
to the primary market being the only
execution venue. Depending on the
size, complexity and type of order, the
decision about how to execute was
easy – the choices were: to the market
(DMA); to the sales trader (with average
difficulty); to capital engagement (very
difficult); or eventually to one or more
dark venues (with anonymity and no
market impact).
A broker review was based mostly on
cost criteria. The most commonly used
execution quality benchmark was based
upon the volume weighted average
price, or VWAP. With new regulations
stating that institutions must optimise
order executions, and as a consequence
of reducing the number of brokers, the
sellside is now obliged to show the
benefits they offer to their clients. In
time other simple benchmarks emerged
based upon market quotes or trade
activity. These benchmarks included
OHLC (open/high/low/close), TWAP
(time weighted average price), and
Arrival Price (derived from venue mid
spreads and quote depths at the time of
order receipt).
MiFID has, as anticipated, created
greater competition between venues,
resulting in a more fragmented
environment, and consequently it has
become more difficult to assemble
New challengesin a new world
Transactioncostshavealwaysbeenofgreatconcerntothebuyside.PabloGarmon,Europeanbusinessdevelopmentmanager,TAG(TransactionAuditingGroup,inc.)Europeoutlinessomeofthechallengesinapost-MiFiDworld
BTCA Guide 09.indd 17 6/4/09 15:51:57
�� BestExecutionGuidetoTCA2009
METHoDoLoGy
an aggregate view of all market centres and
to develop a viable reference or benchmark.
Another undesired effect of post-MiFID
fragmentation is the lack of transparency in
the OTC markets. Basically, MiFID has defined
three types of venues: Regulated markets,
MTFs and Systematic Internalizers. Transactions
occurring through any other means are
considered OTC and must be reported as
such to a regulatory body. Of course, plenty
of new authorized reporting mechanisms
have been created, but there is a degree of
uncertainty that comes from the ‘creativity’
of some of these entities – not necessarily
doing anything wrong, but taking advantage
of some grey areas under MiFID. The point
is that many buyside firms find it difficult to
aggregate the full volume traded on any single
stock, especially in identifying and including
all non-light consideration (turnover). As a
consequence, they have lost the benchmarks
needed to measure and compare their brokers.
Despite some pronouncements about a
single tape in Europe, the fact remains that
to measure the cost of a transaction buyside
brokers need new, broad-based benchmarks in
order to assess the quality of trade executions.
TAG, having recognised this need, has
extended its well-established best execution
capabilities to accommodate the complexities
of post-MiFID trading. We have launched new
ways of assembling pan-European market
data and execution quality metrics for each
trade, each broker, each venue, each security
and each currency. Some of these important
new benchmarks measure individual trades
and orders against actual cross-venue market
quotes and depths of book, timeliness and
completeness of order executions, and trading
aggressiveness.
Of course, direct costs are still part of the
analysis. But more than 60% of the costs of a
transaction are ‘’hidden costs” associated with
the difference between the best price at which
a trade, or series of trades, could have been
executed and the actual prices of those trades.
Execution quality = Δ (Theoretical price,
execution price)
There are several existing TCA products that
estimate costs using the most popular and
basic methods. Our offerings incorporate a
wide range of measurements and on-demand
flexibility. The TAG TCA online report
synthesizes all previous metrics with newly
developed execution quality and trading cost
benchmarks.
Recently, we have introduced many
benchmarks of liquidity fragmentation and
execution quality. They are split into several
groups of metrics that cover: Market Share,
Turnover, EBBO Price and Size analysis,
Spread analysis, Market Impact and Order
Flow characteristics. These benchmarks apply
not only to brokers, but also to venues. Other
newly implemented benchmarks are Basis
Points improvement and Hit Ratio, which
are more specific to venues. Brand new to
the industry, under a TAG patent is VWAM:
Volume Weighted Average Market. This is a
pure ‘quality of execution’ benchmark that
compares the actual price of every trade
execution with comprehensive EBBO data
across the full life of every single order.
The TAG universe is comprised of our analysis
of all the stocks listed on the major European
markets. Our approach is standardized,
accurate and global.
In a newly fragmented world with very
complicated post trade reporting, we bring
a new way of evaluating transaction costs
based upon innovative benchmarks and a long
history of independent, creditable execution
quality measurement.
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