New research produced by GreySpark Partners, a leading global capital markets consultancy, makes the case for a new form of pre- and post-trade TCA reporting that utilises a breed of Big Data known as Smart Data to provide buyside firm trading desks and their end-investor clients with a greater understanding of the quality – as opposed to just simply the ‘effectiveness’ – of trader decision-making on an order-by-order basis.

Small-to-medium-sized asset managers and other types of buyside firms can struggle to compete effectively with the budgets of larger market participants. Very large-by-AuM competitors, as well as investment bank broker-dealers, are able to expend significant amounts of budget and resources on the internal development of a wealth of analytics across all major asset classes. This greatly enhances client understanding of the value-adds associated with their trade performance and provides a significant competitive advantage to those firms.

The new GreySpark article titled  TQA to Become the TCA Hygiene Factor of the Future –argues that the informal rules regarding the use of TCA to prove best execution on equities and non-equities asset classes alike have changed since the implementation of post-financial crisis regulations. As a consequence, buyside firms must adapt the ways that they demonstrate their value-add as a matter of urgency to ensure that they are providing their clients or end-investors with a high-quality level of pre- or post-trade best execution analysis.

Current efforts to express value-add – which are typically communicated through a steady supply of broker-provided TCA reports – ultimately expose the inherent flaws within traditional methods of pre- or post-trade performance assessment. Market and trade data applied to pre- or post-trade activities is typically proxied using the market participant’s own recent intake and output of relevant input variables to a model based fundamentally on assumptions.

Thus, that data, and the models based upon it, are inherently stale from the get-go. As such, GreySpark believes that the ability of asset management firms to individually answer two questions over the next five-to-10 years will ultimately drive the uptake of TCA services provided by broker-neutral, vendor-provided toolkits:

• Volume-weighted Average Price – Is this form of predominantly composite analysis currently provided by D2C venues sufficient for regulatory compliance purposes?
• Internal Data Management, Structuring & Warehousing – To what extent are asset managers willing to take ownership over the normalisation and standardisation of the wealth of historic bonds and swaps market, pricing and transactions data stored within desk- / fund- / portfolio-specific operational siloes to then move to a state in which they can consistently leverage competitive advantage on a trade-by-trade basis?

In fixed income markets specifically, the use of such broker neutral, vendor-provided Smart Data analytics solutions would allow for the generation of a new form of TCA called Transaction Quality Analysis (TQA), which would be centred around the ability of asset management firms to know – and not guess – what the market impact of either a book of axed trades or a collection of block-size bonds and swaps orders would be on the entirety of a firm’s available liquidity on:

• a liquidity provider-by-liquidity provider basis; and
• across the entirety of all the available execution pathways and venues.