Transaction Cost Analysis (TCA) should help a buyside firm achieve two simple objectives: demonstrate Best Execution, and provide insight into trading performance to improve trader decisions. The ultimate goal is always to lower trading costs and increase portfolio returns.
One of the problems with classic TCA offerings is that they are generally expensive, complex, and can rarely help determine the optimal broker/algo/venue combination. All too often, classic TCA creates more work than intended. The reports are generally long, complex and require a significant investment of time to digest to make sense of. It is often difficult to separate the signal from the noise in the reports without spending considerable time slicing up data via cross-sectional analysis (simple examples include looking at algo performance by market cap, or parent order % of ADV). Even then, the signal might be confusing or contradictory. In many ways, this defeats the value of the exercise itself and can actually hamper the duty of Best Execution.
KOR Group has found that for TCA, one size truly does not fit all firms.
Traders and Portfolio Managers who try to move in the markets quickly and nimbly don’t want to be bogged down reviewing complex reports and statistical measures that may or may not help to guide future decisions. In a fragmented trading environment with many brokers, algos and even asset classes, this chore becomes all the more difficult with classic TCA.
At KOR Group, we’ve done dozens of consulting engagements that help firms create reports customized for their purposes, or to make sense of their existing reports. We strongly believe a consultative, customized approach works better for many advisors - both big and small. We’ve helped to create different reports for different audiences within (and external to) a firm - a critically important consideration in effective TCA.
We have set about to address the shortcomings of classic TCA, and to make TCA both affordable and effective. We have found that often less is much, much more. Instead of strict quantitative analysis, we work with clients to understand what each report means, and what actions they can take. With our decades of experience, we can help our clients answer the questions:
What does it all mean?
How does it match up to historic trends?
What are the most important metrics to monitor?
What are the outliers?
We realized that it’s not good enough to know what happened in the past; that pre-trade decision making should be guided by a combination of quantitative analysis and deep market structure expertise. We’ve pushed the envelope through customized, quantitative analysis projects for our clients, leveraging machine learning techniques such as unsupervised clustering, decisions trees and more advanced estimation techniques.
Have you struggled to turn classic TCA analysis into action that reduces implicit and explicit costs? Do you find the data overwhelming to deal with? Have you struggled to track the results of order routing changes? Do you feel that the money paid for TCA is well spent? Or would you prefer something simpler, yet more effective? As budgets tighten but client expectations and due diligence increases, we can help you better understand what’s happening to your orders while demonstrating true Best Execution.