Investment Operations

Greenwich: After COVID-19 Disruptions, TCA Regains Momentum

Securities Lending and borrowing

COVID-19 disruptions interrupted what had been the steady growth in the use of trade-cost analysis (TCA) on buy-side trading desks. Beneath the surface, however, traders continued to prepare for a deeper integration of TCA tools into the equity trading process driven by new regulations and advancements in data analytics.

The COVID-19 crisis caused some buy-side firms to hit the pause button on TCA adoption. After increasing from 84% in 2018 to 89% in 2019, the share of North American asset managers using TCA dipped back to 83% in 2020, according to the results of the annual Greenwich Associates Trade Desk Optimization Study.

“Work-from-home and the many other pressures associated with the pandemic forced a slowdown in some critical initiatives as the buy-side focused on execution and scrambled to maintain day-to-day operations,” said David Easthope, Senior Analyst for Greenwich Associates Market Structure & Technology, and author of Equities TCA 2021—A Transitional Year

Although the crisis slowed the overall expansion of TCA, it did not stop its evolution into an increasingly important tool for trading desks, as evidenced in part by the slow but steady increase in the share of buy-side firms employing TCA specialists, Easthope said. 

Rule 606
These specialists and other buy-side firms are focusing considerable attention on the Q4 2020 implementation of the Security and Exchange Commission’s “Institutional 606,” which requires brokers to dramatically expand the amount of information on trade routing and performance they provide back to clients. The development of these rules contributed to the rapid growth of TCA, which should become more effective and valuable with this new information. 

An Interactive Trading Assistant
TCA was originally employed primarily to demonstrate best execution and for post-trade performance reviews. Today, TCA is an analytical tool in forecasting and modeling to assist traders at multiple points in the trading process. The enhanced reporting requirements from Rule 606 will create new datasets that will enhance TCA’s effectiveness in assessing performance in the U.S. markets.

“With more data and increasing access to cloud-based analytics platforms, TCA is moving from a post-trade report card to an interactive trading assistant,” said Easthope.