Today, financial stakeholders are gradually using Transaction Cost Analysis (TCA) to better regulatory compliances and reducing cost.

TCA is the review of trade prices to evaluate if the trades were settled at optimal prices or not, i.e. high prices for sales and lower prices for purchases. Brokers and investment managers all study transactions to analyze whether their trading processes are producing the best desired possible results. Investors also use TCA to conclude whether their managers are adopting efficient trading strategies. The conclusion from these analyses are then used to streamline the trading processes.

TCA is a very old concept and is becoming a highly important feature of foreign exchange (FX), equity markets and fixed income. Insufficient Analysis of TCA effects hedges fund, pension funds, and asset managers in terms of lower investment performance and potentially diminished capital.

A report by the company Markit revealed that 70% of surveyed used transaction Cost Analysis for equities as compared to 52% for fixed income and 53% of foreign exchange transactions. The most important function of TCA is to improve trading performance and reduce costs. It provides two types of information. The first type is the daily report of exceptions and variances which is achieved by relating every trade to participation-type practices. The other is the statistical study on a cumulative level that can be used to compare venues, algorithms, trading strategies and traders based on a combination of pre-trade standards.

TCA must be timely, to analyse the accurate results on the basis of recent trading activities and existing orders. Also, it must be pertinent, so the datasets used to conduct the study should be comparable. Moreover, TCA must be easy to attain, so that the data accumulation and analysis opinions shouldn’t affect the trading process.

According to BestX director Pete Eggleston, “To enable clients to use the service with confidence, it is imperative that the analysis is totally unbiased”. It is also vital that a stability of method is adapt to allow transparent and efficient performance comparisons.

The key challenge of Transaction Cost analysis is to decide whether a trade price is high or low for a distinct market scenario at the time the order was processed. TCA at times also look at the opportunity costs related to trades that are incomplete.  The failure of a trade can be very harmful to portfolio results if the trade upon completion proved to be very profitable.

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