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Including Post-Trade Costs in Transaction Cost Analysis (TCA)


The world of capital markets is complex and dynamic, and traders and analysts are continually looking for new ways to optimize trading strategies. Transaction Cost Analysis (TCA) has long been one of the key tools in this ongoing quest. However, there’s an ongoing debate: Should we include post-trade costs in our TCA?

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Before delving into the question at hand, let’s briefly recap what TCA is. Transaction Cost Analysis is a methodology used to measure the efficiency of executed trades. It includes pre-trade analysis (predicting costs before a trade occurs), real-time trade analysis (measuring costs during a trade), and post-trade analysis (assessing costs after a trade has been completed). This comprehensive analysis allows traders to measure and compare their trading performance and execution quality across different brokers, venues, and strategies.

When it comes to post-trade costs, the traditional viewpoint has often left them out of the TCA equation. This is largely because these costs, which include custody fees, taxes, clearing fees, and other expenses, are seen as unavoidable and not directly related to the execution process. They are typically considered ‘sunk costs’ that don’t provide much actionable insight for future trades.

However, this traditional viewpoint is increasingly being challenged.

There is a growing school of thought that argues for the inclusion of post-trade costs in TCA. The reason is quite simple: all costs associated with a trade, whether pre-, intra-, or post-trade, affect the net return of that trade. To truly assess the efficiency and profitability of a trade, one should consider all costs incurred from the inception to the completion of the trade, including post-trade costs.

In the context of a globalized and interconnected world, the impact of post-trade costs can be significant. For instance, taxes, which vary from one jurisdiction to another, can significantly affect net returns. Similarly, custody fees can vary between custodians, and even small differences in these fees can have a meaningful impact on net returns, especially for high-volume traders.

Inclusion of post-trade costs in TCA allows traders and analysts to have a more holistic view of their trading performance. It also enables them to identify potential areas of cost savings that were previously overlooked. For instance, they might find that using a different broker, venue, or custodian could result in lower post-trade costs, thereby increasing net returns.

The inclusion of post-trade costs in Transaction Cost Analysis is not just about comprehensive cost accounting. It is about understanding the full picture of trading performance and identifying all potential areas for optimization. While the traditional viewpoint of TCA may have ignored post-trade costs, the evolving market dynamics and the continuous quest for improved trading performance necessitate their inclusion.

As with any methodology, there is no one-size-fits-all approach to TCA. Different traders and analysts may have different views on the inclusion of post-trade costs, depending on their specific trading strategies and objectives. However, the key is to remain open to new ideas and continually re-evaluate our methodologies in light of changing market conditions and evolving best practices.

As capital market professionals, we must strive for a more holistic approach to Transaction Cost Analysis, one that includes post-trade costs. This approach not only provides a more accurate reflection of trade efficiency but also enables us to uncover new opportunities for cost savings and performance improvement.