Transaction Cost Analysis (TCA) and Execution Quality

Transcription

1 Transaction Cost Analysis (TCA) and Execution Quality Michael Caffi, Principal, State Street Global Advisors Thomas Rodde, VP Trading Analytics, Fidelity

2 A Buy-Side Perspective of Transaction Cost Analysis Michael Caffi, Principal Global Equity Trading State Street Global Advisors

3 TCA Basics What is TCA? A collection of methodologies to determine the cost of trading at any or all points in the investment life cycle. Delay Cost waiting at any time during the trading cycle Impact Cost the cost of demanding liquidity Opportunity Cost the cost of not trading Performance vs. a given benchmark A way to determine Best Execution Defined by the firm what is important to you. What isn t TCA? Best Execution A marketing tool!!! FPL Electronic Trading Conference

4 Reasons for TCA Improving the efficiency of the investment cycle. Delays in the decision process can affect the trader. Sometimes costs are unavoidable and need to be justified. Benchmark trading strategies and trader s tools. Algorithmic Trading Tools Broker effectiveness and comparisons To meet internal / external compliance mandates. SEC and CFA Institute recommendations. FSA A tool to gauge trader compensation? FPL Electronic Trading Conference

5 A Look at SSgA s TCA Process Evolves around our historical database of measured transactions. Centralized management of a global process. Liaison to traders, PMs, client service officers, TCA vendors, etc. Flexibility in reporting. Any frequency, grouping, and/or aggregation By event. Daily review and signoff for internal compliance. We take a best of breed approach Most analysis can be generated in-house Use external systems when needed Plexus for independent quarterly review. FPL Electronic Trading Conference

6 TCA Quick Case Study (Perspective Matters) FPL Electronic Trading Conference

7 Final Thoughts TCA is a beneficiary of the proliferation of FIX Protocol (TGIF!). If you are not using FIX, then you are losing valuable information and perhaps even $$$ due to inaccurate TCA. Measurement systems are more sophisticated than ever, but techniques have not changed that much. Still part art and science. FPL Electronic Trading Conference

8 Transaction Cost Analysis and Execution Quality: Tools and Techniques Tom Rodde, VP Trading Analytics Fidelity Investments

9 Tools are available to analyze how well you did in the past, with detailed views across venues, orders, and trading styles FPL Electronic Trading Conference

10 and on a pre- and during-the-trade basis to supply insights before you are committed FPL Electronic Trading Conference

11 Why Bother? Provide greater clarity around transaction costs and managers /brokers trading capabilities Help formalize the measurement, monitoring and improvement of trading Upgrade your dialogue with plan sponsor clients and regulators Understand the manager/broker relationship and the value being delivered through trading Serve as an internal and external marketing tool for sponsors, managers and brokers Enable the ongoing assessment of trading objectives, soft dollar arrangements, and brokers strategies FPL Electronic Trading Conference

12 The Benchmark is Key. Measurement Approach Key Features Pre - Trade Comparison A price that existed prior to the trade, e.g., the last trade, previous day s close, target cost, etc. Rough measure of market impact of order (e.g., previous close) Opportunity to set trading strategy (target cost analysis) Volume Weighted Average Price The volume weighted average price (VWAP) of all shares traded in the stock during the day Available VWAP - VWAP from the time the order reaches the trading desk until the close Interval VWAP - VWAP from order receipt to completion Reflection of average prevailing prices on any given day Post - Trade Comparison Closing price on trade date, or any benchmark price subsequent to the time of execution e.g., T+1, post- relaxation, etc. Quantifies costs of subsequent price movements Can capture opportunity cost of unexecuted shares Implementation Shortfall The costs incurred from the time a manager decides to buy or sell a stock to the time the decision has been implemented Often based on regression analysis-based target price - what the trade should have cost the plan, manager, broker - based on what similar trading situations have cost in the past Also captures opportunity costs FPL Electronic Trading Conference

13 A Compendium of Advanced Tools Theoretical pre- and post-trade benchmarks Scenario modeling Intraday monitoring of results Price prediction models Volume schedulers Cost predictors Liquidity modeling FPL Electronic Trading Conference

14 Next Sessions 4:00 PM EXHIBIT HALL 3RD FLOOR Afternoon Break with Exhibitors 4:30 PM GRAND BALLROOM-3RD FLOOR FAST Protocol: Live Demo and Discussion of FIX s New Market Data Protocol FINANCIAL CENTER BALLROOM-2ND FLOOR Evolving Implementations of OMS and EMS Solutions 5:30 PM Cocktail Reception in Roy s Restaurant/Hawaiian Fusion Cuisine FPL Electronic Trading Conference