TradingScreen’s Fatica Discusses TCA Adoption
TradingScreen’s Head of Analytics Jon Fatica discusses the penetration of TCA tools across the buy side, where TCA resides in the firm, and more in this recent Q&A.
Q: There was an Automated Trader survey that showed relatively low penetration rate within the buy side for TCA. What do you make of that?
A: I think the numbers they quoted about traditional asset managers being ahead of the pack and adopting TCA was a legitimate point to make. They quoted a number around 70%, and I think that may be low considering what I’ve seen in the past and what other anecdotal surveys indicate. But, it is a global number, and it points to the fact that traditional asset managers have adopted TCA–large traditional asset managers–more than other managers; those being: smaller traditional asset managers, family offices, or even hedge funds of reasonable size.
Clearly, sell side and other participants in the marketplace are even lower [in adopting TCA]. But on the issue of smaller asset managers not being as well represented using TCA, I think that’s changing. We’re seeing early evidence of those asset managers having the same concerns as larger asset managers: about executing with lower impact–finding that even though they may have fewer assets under management and proportionally smaller order sizes, because liquidity has largely declined, their orders are now proportionally higher than they’ve been in the past and the demand on liquidity is proportionally more with the impact that follows.
So they’re looking for ways to appear smaller–more like retail–just as the larger asset managers. We’re seeing these concerns more frequently with inquiries on our product offering; same sort of questions that are asked by the large asset managers when they come to interview us:
1- What’s the level of your data quality?
2- Can you provide analytical support?
3- Can you focus on the performance of algorithms?
They’re asking really penetrating questions about what they would get for that kind of service. It’s not about just “checking the box” anymore.
Q: What’s the catalyst for these smaller firms adopting these tools? Are they just getting wise to the advantages or is there a regulatory angle?
A: Well, there are regulatory angles and some of those that have come to talk to us have cited the need to have more surveillance reports, which is a little different than TCA, but it’s still a monitoring of the business process and the activity in the market, but also what the market is doing. They have a legitimate interest in TCA because they really want to eke out additional basis points and it’s very competitive to beat indices. Even the hedge funds are challenged by that. So, they are looking for any way to gain insight into perhaps what others are doing. So, we collect information about peer activity and they find that interesting as well.
Q: In your experience with the buy side firms you’re running across, are they using an internal solution or a third-party solution when we get there?
A: Well, we’re seeing both. The traditional asset managers have long employed external sources, and in fact, really rely on that as an independent and objective provider of that type of information. Plus, we and they and others who are independent, provide a peer analysis, which gives insight on what the market in general is doing, not just that one manager.
But more and more, the asset managers–the large asset managers in particular–have adopted TCA at a very low level. Even traders now will put a great degree of demand for more analysis, more reports, more insights, and more follow-up. It just makes sense to have some of that internalized. So we’re seeing more of that evolve, and in fact, there are more questions about where is the best place to put that individual in the institution’s organizational structure.
Is it in the compliance department? Is it on the trading desk? Is it in the portfolio construction area? Is it in operations?
TCA, because it is a reflection of the entire business process, you can put the person in almost any one of those places. But, I think that it is most effective to have the internal resource assigned to the Trading Desk.
Q: Where does TCA typically reside?
A: Most frequently, in the past, I’ve seen it at the portfolio construction or compliance level. But, I think now that the trading desk is much more interested in having a hands-on individual. I think some of the early adopters and those that internalized the support function did put the person on the trading desk, or made one of the traders, perhaps a junior trader, responsible for those as the interest activity, analyses, detail and reporting group, they simply assigned a person to that. There is a fair amount of transferred intellectual capital to those people and the practices have become internalized to the point where they’re maybe even doing their own surveys of broker information. So, there’s anecdotal evidence that a number of brokers have been approached to send their trades to the asset manager under NDA and confidentiality agreements for it be analyzed internally and compared.
Q: Is it useful to look at the penetration by asset class across the whole buy side or does it depend on different firms and how they trade?
A: The asset class question is becoming more important. Many of those who ask us about our offering intend, or seemingly intend, to branch out into other asset classes. Or in fact, they’re asking us about our capability to do multi-asset TCA, and FX being front-and-center right now for a lot of different reasons, there are different opinions–there are the traditional people who think that there’s nothing to be learned about a very liquid FX market, and then there are others that are looking to be more nimble. We are servicing both of those people. Also, there is a great need of the whole industry to create more insight into what goes on in fixed income. Transparency in fixed income has never really existed, and I think there are opportunities now for that to begin to develop as more sources of electronic information are becoming available and more electronic platforms are available.