Institutional Investors Increasingly Using Transaction Cost Analysis

In 2011, 35% of the institutions participating in Greenwich Associates annual U.S. Equity Study said their compliance departments used TCA systems to ensure best execution. Almost 40% of the institutions taking part in that research said they use TCA systems to assess broker performance on internal trading desks, 38% said they employ TCA to identify outlier or problem trades, and 37% said they use TCA to measure active trading results against a benchmark.  

“Those responses represent a reversal from 2010 results, in which compliance topped all other functions, with the exception of identifying outliers, as the primary role of TCA for U.S. institutions,” said Greenwich Associates Director of Institutional Marketing Jennifer Litwin, in a press release. “If that trend carries over to other markets around the world, 2011 could emerge as something of a watershed moment in the development of TCA — the point at which institutions started viewing these systems as something more than ‘check-the-box’ compliance tools.”  

The study results suggest that, although institutions still harbor some serious concerns about the shortcomings of existing TCA systems, they are beginning to expand the role the TCA process plays within their organizations. 

A growing number of institutions are using TCA in products other than equities. TCA systems were first deployed on equity trading desks, and it is in equities that the process is most regularly used. Among study participants that identified themselves as active equity investors, almost 70% employ TCA in their investment process. However, about a quarter of the institutions participating in the Greenwich Associates study use TCA in fixed income, and a similar share employ TCA in foreign exchange trading.  

Although it is still early days in the development of TCA processes for use outside the world of equity trading, the study results suggest that TCA systems are starting to gain some traction in fixed income and foreign exchange. In both of those markets, nearly a quarter of intuitions now use TCA.