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Analysing TCA

Carlos Oliveira, Electronic Trading Solutions at Brandes Investment Partners examines the process of choosing a TCA provider, and the role of FPL.
We use Markit’s Execution Quality Manager (formerly known as QSG) for equity trading TCA. Our decision to switch providers was based on increased algorithm usage, a desire for more functionality, greater execution transparency and most importantly, the availability of more granular data for analysis via FIX.
We FTP our data daily and the results are available to us no later than US market open the next day. Trades are reviewed against traditional and custom benchmarks. We grant access to every trader and risk member, so that they can construct their own views as desired. Typically on a quarterly basis, we conduct our own and adapt broker studies to better understand the impact of our orders.
The implementation process
We evaluated four providers before making our final decision. We wanted a flexible platform that would accommodate maximum self-serving, custom reporting needs; minimal ongoing maintenance or upgrades requiring internal resources; and flexibility on custom solutions, such as the proper measurement of our ADR creation activity.
One vendor offered a very rich solution that was beyond our needs. For two others, we were not comfortable with the process for submitting data and how much work we would need to do internally. A key determinant was the overall level of commitment to the implementation, which we concluded Markit’s Managing Director Tim Sargent clearly demonstrated. It took us roughly two months to solidify the extract process and we went live on January 1, 2011.
TCA has become a key component of our trading process and we continue to realise value, primarily for post-trade at the moment. The value comes from the constant learning about our orders, what has worked well or not, and the adapting and improving of trading.
The large amount of data to analyse can be overwhelming at first and easily misinterpreted if not careful.
Frequent and honest dialog with the vendor, the traders, as well as tapping other sources of knowledge (i.e. broker TCA contacts and industry publications) is key to a successful implementation. Many reports went through several iterations, sometimes a quarter or two apart, before we got it to a meaningful and actionable state.
To avoid having too much of a one-side perspective, we compare broker-provided TCA reports with our vendor often. This helps the dialogue with both the brokers and the vendor – keeps both parties engaged and attentive.
The role of FPL
Our interaction with FPL began with the TCA implementation.
In late 2010, in conferences as well as in industry press, many parties were encouraging the buy-side to gain a better understanding of broker SOR practices and where the orders were getting executed, but with no actionable recommendations outside a specific platform. Being broker-neutral, the FIX execution venue reporting best practices proposed in early 2011 by the FPL Americas Buy-side Working Group helped us to move forward with this goal in the TCA platform. FPL Membership has enabled further contact with other buy-side firms and knowledge sharing not available otherwise to a smaller firm.
We started by asking for Tag 30, LastMarket. Broker responses to the data request varied greatly across brokers and regions. Correspondence spanned many months and contacts, particularly when we asked for MIC codes as opposed to proprietary values. We understand the queue priorities of brokers’ systems and demands of larger clients, and are very appreciative for what they have done thus far.
Some of our broker relationships have been exceptionally supportive in this effort, leading to enhanced dialogue on routing practices and more meaningful, targeted market structure content calls. Though not perfect, it is a significant improvement from just a year ago.
Ideally we would like to move forward and obtain data for Tag 851, but we are very much aware of the mapping challenges from exchanges to the brokers and to the OMS/EMS systems. We tabled this for 2012, but plan on revisiting it again in 2013.
What is next?
We are currently upgrading our OMS and exploring new functionality. Ultimately we hope for a richer dataset to enhance our capabilities, with some of the current TCA analytics embedded directly in the OMS and as close as possible to a real-time basis.
TCA for FX is also in the works, with a combination of in-house and broker solutions. This is now possible given timestamp collection improvements earlier in the year, but there are challenges still for obtaining data for benchmarking at a reasonable cost.
With greater attention to market structure and its impact to long term investors, the need for further transparency into the execution of orders by brokers, so as to understand our impact and performance will only continue to grow. For example, it would be great to know the sub-routing/destinations visited prior to getting a fill. The dialogue already in place between brokers, vendors and FPL working groups is a great step towards leveraging FIX for some level of data standardisation in the TCA arena that we hope will gain further traction in 2013.

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