According to a new TABB Group report, more than 90% of the financial markets buy-side firms will have transaction cost research (TCR) systems in place by 2007.
The report, “From Best Ex to Coaching: The Future of Transaction Cost Research” written by Adam Sussman, senior consultant at TABB Group examines TCR methodologies and their real world application. It identifies the market forces that are driving the growth in TCR and the increasing pressure on institutions to justify their trading strategies and counterparties.
TABB Group defines TCR as an attempt to estimate or measure the cost of a transaction and subsequently provide guidance on how to effectively manage those costs within a trading strategy. All transactions have explicit and implicit costs. Explicit costs are disclosed prior to the trade and include commissions, markups and other fees; implicit costs represent the effect that a trade, or set of trades, has on the market and are determined only after the execution is completed.
“Now that market participants have cut down explicit costs, minimizing the implicit costs and balancing those with trading strategy has become an important factor in the proliferation of transaction cost research,” said Robert C. Gasser, chief executive officer of NYFIX Transaction Services, Inc.
Originally designed to fulfill regulatory requirements for investment managers addressing commissions to broker-dealers, TCR has become invaluable to buy-side firms looking to gain competitive advantage, gather more assets, increase returns and streamline compliance procedures. In response, TCR has now evolved from simple Excel spreadsheets to comprehensive third-party tools designed to analyze the implicit costs of each trade and the breakdown of those costs.
“Recently, post-trade TCR providers have focused on either a macro approach concentrating on long-term trends, or a micro approach looking at individual trades,” said TABB Group’s Sussman. “These demarcations are beginning to blur, with some vendors beginning to offer both macro and micro analysis.”