Transaction Cost Analysis Makes Leap to Bonds, Foreign Exchange

With regulatory changes driving the shift, market participants need better data and benchmarks, firms in our annual TCA ranking say.


Over the past ten years, broker-dealers and asset managers have developed sophisticated transaction cost analysis (TCA) systems for equities, and now they’re starting to build TCA for the fixed-income and foreign exchange markets too.

“The trend of TCA is going multiasset-class,” says Alex Clode, business manager for trade analytics at Bloomberg, whose agency broker-dealer, Bloomberg Tradebook, takes 11th place in Institutional Investor‘s 2016 U.S. arrival price ranking for broker-dealers, part of our annual TCA survey. Regulatory changes, especially in Europe, are driving the shift, he adds. “The regulations extend requirements on best execution and make clear that it’s across all asset classes,” Clode says. “So there’s a scramble [by broker-dealers] to monitor execution.”

Several new rules are behind the trend:

  • The European Commission’s revised Markets in Financial Instruments Directive and new Markets in Financial Instruments Regulation (MiFID II/MiFIR) seek to improve execution and transparency, particularly for derivatives trades. The rules take effect on January 1, 2018.
  • The EC’s packaged retail and insurance-based investment products (PRIIPs) rules increase transparency for a wide range of investment products. These regulations also begin in January 2018.
  • The U.S. Municipal Securities Rulemaking Board’s Rule G-18 took effect on March 21 and lays out best-execution rules for the muni market.
  • A requirement by the U.S. Financial Industry Regulatory Authority that most Treasuries transactions be reported to FINRA’s Trade Reporting and Compliance Engine (TRACE) goes into force on July 10, 2017.

Among U.S. brokerages, Credit Suisse claims the No. 1 spot in this year’s survey with an average cost per transaction of 24.45 basis points below the volume-weighted average price (VWAP) for the universe covered in the year ended June 30, 2016. Brandes Investment Partners takes first place among U.S. investment managers with an average cost of 44.67 basis points below VWAP. Globally, Russell Implementation Services leads brokerages with a cost of 35.06 basis points below VWAP; Goldman Sachs is tops among investment managers with a cost of 22.03 basis points below VWAP.
“Regulatory changes are making data more readily available” for TCA in multiple asset classes, says Hubert de Jesus, co-head of electronic trading and market structure at BlackRock, which ranks seventh among U.S. asset managers for VWAP. That helps to address the fundamental challenges of TCA for bonds and foreign exchange. “You need accurate market data to provide context to the trading that you’re doing,” de Jesus says.

He and others note that pricing and trade data are much harder to come by for fixed income and foreign exchange than for stocks. Unlike equities, most bonds and currencies don’t trade on exchanges.

“To have meaningful TCA, you need an order book at your disposal,” says Ryan Larson, head of equity trading for RBC Global Asset Management (U.S.). “Some of those components aren’t available for fixed income and even less so for foreign exchange.” RBC ranks 18th among U.S. asset managers for VWAP.


On the bond side a corporate issuer can have multiple CUSIPs (Committee on Uniform Security Identification Procedures) outstanding, in contrast to equities, where there is typically one security, de Jesus notes. And bonds mature and disappear, also unlike stocks. In foreign exchange, there’s a lot more data available for the most liquid currencies than for their less widely traded counterparts.

It helps that trades for bonds and currencies are moving onto electronic platforms where there’s more transparency of trading records, de Jesus says. “All products are becoming more electronic today, so more progress will be made” in compiling data, he reckons.

After the data has been gathered for these markets, the question is how to place the information into benchmarks so market participants can make judgments, Bloomberg’s Clode says. “Once you’ve brought the data in and can bring in analytics, it’s a short step to apply posttrade analysis. You can use the same infrastructure and process [used for equities] to deliver on execution and for posttrade surveillance.”

Clode and others expect that TCA will evolve for bonds and forex: “The demand for more data and benchmarks means a more sophisticated process,” he says. Until recently, TCA was focused squarely on stocks, getting more and more granular. “But now there’s a bigger and broader focus in other spaces that don’t have anything as basic as the equity market did five to ten years ago,” Clode observes.

As for progress on the equity side, “there’s an increasing desire to feed back insights of posttrade TCA to the pretrade process,” he says.

Another important TCA issue for the equity market is rules proposed by the U.S. Securities and Exchange Commission that would require broker-dealers to disclose information about the handling of institutional orders to customers, including details on order routing. De Jesus thinks the proposal, which was released on July 13, is a good one.

“This is definitely an element of order execution which isn’t readily available to the buy side,” he says. “To be able to look at that data in more detail may give more insight into routing practices and how we can improve execution quality for institutions.”

II‘s TCA survey, conducted by Elkins/McSherry, a division of State Street Corp., doesn’t show much change in transaction costs from last year. Although some of the categories are more widely spread, for the most part they’re about the same. Markets were less volatile in 2016, but that didn’t affect costs much, and it shouldn’t, according to practitioners. “As long as your cost models incorporate volatility in your pretrade cost forecast, that should account for changes in market environment,” de Jesus says.

Meanwhile, Brian Fagen, head of execution strategy for equities at Deutsche Bank, which places sixth for arrival price in the U.S. broker-dealer ranking, points out that although price volatility declined for the stock market as a whole during most of 2016, liquidity for individual stocks remained volatile and fragmented, creating a challenge for single-stock TCA.

Our survey reveals that client trade sizes fell about 10 percent on average, while market volume dipped slightly. “That indicates fragmentation continues apace, providing greater challenges for trading,” says David Griffin, product manager for trade cost analysis at Elkins/McSherry.

This makes it important for trading desks to use leading technology so they can access the fragmented liquidity, stresses RBC’s Larson, who notes that TCA has qualitative as well as quantitative elements. “There’s order timing and order intent,” he says. “If our traders aren’t aligned with portfolio managers, we can’t say there’s best execution.”

For Larson, counterparty risk and monitoring are other qualitative considerations: “We have to be sure we are executing with partners that meet our tests so they won’t impose operational, settlement, or reputation risk.”

TCA is also evolving to include analysis of trading environments. “Are we in a momentum environment or a reversion environment?” Larson asks. The idea is to connect that environment to the portfolio manager being served. If the purchasing manager deploys a momentum strategy, trading desks can use TCA to figure out where the market stands on the momentum curve and thus when to trade and in what amounts, Larson says.

Given all of the new issues coursing through the TCA space, “2017 will be a busy year in enhancing trading analysis for all asset types,” Griffin predicts.

Top Global Brokerages

Rank Broker Type Broker Cost Difference
vs. Survey Universe?*
1 Agency Russell Implementation Services –35.06
2 Full-Service Lazard –27.68
3 Agency Bernstein –26.80
4 Full-Service Allen & Co. –25.69
5 Agency State Street Global Markets –24.90
6 Full-Service Numis Securities –24.60
7 Bulge Brackets Investec –23.35
8 Full-Service FBR Capital Markets –20.98
9 Full-Service BTIG –20.12
10 Agency Bloomberg Tradebook –20.08

Top Global Investment Managers

Rank Manager Cost Difference
vs. Survey Universe?*
1 Goldman Sachs –22.03
2 AllianceBernstein –20.81
3 Capital Guardian –16.24
4 BlackRock –15.62
5 LSV Asset Mgmt –15.31
6 William Blair & Co. –12.93
7 Schroder Investment Mgmt –12.72
8 AXA –12.65
9 GMO –11.63
10 Cohen & Steers Capital Mgmt –9.93

Top U.S. Brokerages

Rank Broker Type Broker Cost Difference
vs. Survey Universe?*
1 Bulge Brackets Credit Suisse –24.45
2 Full-Service BMO Capital Markets –20.65
3 Agency State Street Global Markets –18.93
4 Agency Fox River Execution Services –17.49
5 Agency Agency Trading Group –17.21
6 Full-Service Burnham Securities –15.53
7 Agency ITG –12.30
8 Bulge Brackets Goldman Sachs –12.24
9 Full-Service BTIG –12.01
10 Full-Service Cantor Fitzgerald –11.68

Top U.S. Investment Managers

Rank Manager Cost Difference
vs. Survey Universe?*
1 Brandes Investment Partners –44.67
2 Huber Capital Mgmt –38.52
3 Hotchkis & Wiley Capital Mgmt –29.45
4 Goldman Sachs Asset Mgmt –21.66
5 Pzena Investment Mgmt –21.63
6 TimesSquare Capital Mgmt –20.90
7 BlackRock Asset Mgmt –18.10
8 Arrowstreet Capital –16.99
9 Spectrum Asset Mgmt –16.21
10 Numeric Investors –15.56

*?Transaction costs, in basis points, benchmarked against full-day volume-weighted average price, for 12 months ended June 30, 2016.Source: Elkins/McSherry.