June 22:Operational Risk - Buy-Side Needs Execution Metrics to Support Trade Decisions

Author: RiskCenter Staff
Date: 2005-06-22


The battle for algorithmic trading supremacy will be waged on the transaction cost analysis (TCA) front, although market penetration of algorithmic trading is remarkably high among buy-side firms, usage is still relatively light.

Global independent research and advisory firm, Financial Insights, an IDC company, announced additional results of their recent buy-side survey on algorithmic trading. The battle for algorithmic trading supremacy will be waged on the transaction cost analysis ( TCA ) front, although market penetration of algorithmic trading is remarkably high among buy-side firms, usage is still relatively light. TCA will be the dominant means of product differentiation between competing sell-side firms.

Recent research by Financial Insights, including a survey sponsored by Banc of America Securities and conducted by Financial Insights, has identified TCA as a major factor for buy-side firms in influencing trade execution decisions. This is especially true in the adoption of algorithmic trading. In the algorithmic trading survey, 63% of firms surveyed reported use of transaction cost analysis. In addition, when all respondents were asked what factor would most influence either the adoption or increase in usage of algorithmic trading, transaction cost analysis was the most influential factor.

" TCA has become an important factor in broker selection as well as demonstrating the fund manager's ability to achieve best execution to their clients," says Randy Grossman, Research Manager, Institutional Trading and Investment Management for Financial Insights.

"Whereas 5 years ago TCA was the domain of the brokers and the service bureaus such as Abel Noser and Plexus Group, solutions have now migrated directly to the fund manager's desktop. This gives fund managers and their traders immediate feedback. It will be used increasingly by the buy-side to compare and track the performance of various brokers' algorithms," states Mr. Grossman.