[ A D V E R T O R I A L ]
From TCA to BXA
A rethink of best execution evaluation is needed in light of MiFID II’s
increased scrutiny over evidencing broker selection. Rebecca Healey,
Liquidnet’s head of market structure & strategy outlines feedback
from 55 global asset management firms in this exclusive extract from
her recent research paper ‘Re-Engineering Best Execution’.
B
est execution no longer equates
to a mere ‘look back and check’
on trading performance but should
include a robust pre-trade selection
process to be in possession of the
full facts ahead of placing the trade.
Under MiFID II, there is no
mandate to use transaction cost
analysis (TCA) as proof of best
execution. While most buy-side
firms currently find TCA to be the
most effective process to capture
and analyse trade data, this does
not cover all asset classes or all ex-
ecution methods which firms will
now need to be compliant.
Best execution is a process of due
diligence for trade implementation
that requires an understanding of
the context of why a trade is being
placed. The motivation behind
the trade can then be analysed to
understand the execution out-
come and measure performance
appropriately. Any large order that
interacts with the market over a
longer time period will need to
take into account more than just
the best price. Market impact
is likely to occur after every fill,
making it impossible to know with
any certainty that the executions
34
TheTrade
Autumn 2017
received were individually the
best choice of action. A shift is
therefore required from transac-
tion cost analysis to a more holistic
best execution analysis: e.g. a move
from just TCA to BXA.
TCA: one step of the journey
For most electronic of execution
strategies and equity algorithms,
TCA provides a good basis for
scrutinising trading, and is the
method primarily used to monitor
and measure performance. But
there is a growing information gap
for large sectors of some instru-
ments - most notably, fixed income
- which raises the question of the
effectiveness of TCA as a meth-
odology; 39% of the buy side re-
spondents to our recent survey are
currently reviewing TCA practices
or providers, with new alternatives
beginning to make the grade
Already, firms are grappling with
using TCA to measure high-touch
trading and the difficulty increases
exponentially beyond equities. But
it will be the natural surge in data
(available or required) from the
increase in MiFID II reporting that
will necessitate the ability to mine
Rebecca Healey,
head of market structure & strategy,
Liquidnet
data far more intelligently to add
value to the investment process.
Whether for high-touch trading
or fixed income, TCA adapted from
equities is an inadequate ‘shoe-
horn’ fit. Rather, the next gener-