Real-time Transaction Cost Analysis : Building Up the Buy-side Tool Kit
ITG’s Kevin O’Connor sorts the nuts and bolts of real-time TCA and discusses specific strategies with Steve Peterson of the Teacher Retirement System of Texas.
Monitoring and reporting on trading performance in real-time is not a new concept. Trading profit and loss (P&L) calculations and supporting transaction cost information has been available in most Execution Management System (EMS) and some Order Management System (OMS) platforms for a number of years. However, integrating the calculations and information into trading workflows presents a unique problem. Specifically, how do you design a monitoring and feedback system that is fast, easy to use and provides information that will help traders make smart strategy choices. Real-time monitoring can be broken down into three main categories:
- Transaction Cost Analysis
- Risk Monitoring
- Market Conditions (Prices, Volumes, etc.)
Transaction Cost Analysis (TCA)
In its simplest form, real-time TCA consists of comparing execution prices to various benchmarks, such as arrival price, interval volume weighted average price (VWAP) or previous close, and displaying this information back to users as a realized P&L number. In addition to realized P&L, unrealized P&L (which uses a proxy price for the unexecuted portion of orders) can be shown, providing a trader with a view as to the potential exposure remaining in their orders. When analyzing individual orders, real-time TCA tools plot actual executions against market prices to provide a visual representation of the execution “footprint”. When analyzing multiple orders, the tools focus on generating alerts or highlighting performance outliers.
Risk Monitoring
Risk monitoring tools analyze the risk characteristics of a residual tradelist. This typically includes metrics such as total risk, tracking error, beta and sector imbalances. Real-time risk monitoring is used by traders that are looking to minimize total risk while working a program or a list of securities. These tools are also used by portfolio managers and trading desk management to monitor the status of portfolio transitions.
Market Conditions
There are many ways for traders to monitor market conditions. The simplest metrics quantify actual market volume, prices and volatility. For volume monitoring, a comparison of current volume to historic volume is often provided. Order-by-order and aggregate participation rates are also generated, providing traders with a view of their total market participation. For market price monitoring, individual security prices can be compared to industry, sector and market movements. Volatility is another analytic that can be analyzed in real-time. Comparing realized volatility to historic volatility gives traders some perspective on the relative difficulty of the current market conditions.
To make this type of real-time monitoring most effective, it should be available for all electronic trading flow, not just the transactions staged through an EMS. By way of example, Investment Technology Group provides real-time monitoring capabilities for all transactions that flow through broker-neutral platforms. Traders can now get a consolidated view of their trading activity even if they don’t stage all transactions via a single EMS. Using the monitoring capabilities available, traders can quickly and easily monitor real-time market conditions and trading P&L for all of their electronic trading.
I recently spoke with Steve Peterson, Trader and Transaction Cost Analyst specialist at the Teacher Retirement System of Texas about his experience with real-time monitoring tools.
