Guide to tCAcounting the cost

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BestExecutionGuidetoTCA2009 ��

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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

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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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