[ I N - D E P T H
|
T C A ]
across the entire order lifecycle. Armed with such
knowledge, buy-side trading desks assert that TCA
has had a quantifiable impact on execution perfor-
mance and, in some cases, produced alpha in trading
behaviour.
Despite its impact on regulatory compliance,
Daniel Nicholls, head of trading at Hermes Invest-
ment Management - winners of Trading Desk of the
Year in 2018 and Mid-Cap Trading Desk of the Year
in 2019 at The TRADE’s Leaders in Trading cere-
mony - says TCA is not a box-ticking exercise but an
ever-evolving process, and if you want to connect
the dots, you first have to collect the dots.
Hermes has honed its TCA process with a dedicat-
ed and impartial TCA team that works very closely
with the trading desk. It has separate oversight and
is part of the investment office reporting to the best
execution committee, but remains key for the trad-
ing desk in terms of leveraging TCA for impactful
results.
“There is more demand now than ever before in
investment management for increased transparency
at each stage of the order execution process,” Nich-
olls says. “Documented proof of skill, accuracy and
integrity in trading are now necessary and this anal-
ysis has become a tangible asset on the trading desk.
It is an evolving process which looks to identify and
scrutinise any patterns delivering the best and worst
“We want our traders to take the risks they
choose to take. We are trying to eliminate the
risks we don’t want to take where possible.”
executions.
“We don’t expect our traders to have a crystal ball
to predict the future, however, they are now armed
with strong historical analysis for guidance. TCA
gives our traders the information and understanding
that they need to engage with brokers about how we
are using their tools and why we are getting these
results. We want our traders to take the risks they
choose to take. We are trying to eliminate the risks
we don’t want to take where possible.”
The critical step
Every order that hits the trading desk at Hermes
must have a pre-trade benchmark that is document-
ed by the trader. Subscriptions have a benchmark
18 // TheTRADE // Spring 2020
specific to the time the money
arrives in the fund, and if the
order doesn’t have a time-implicit
target, the trader notes this as
‘implementation shortfall’.
It’s at this stage, the execution
phase, that the order ‘belongs’ to
the trader. Be it high- or low-
touch, ownership of the order
does not get transferred to the
broker to achieve best execution,
meaning it’s now up to the trader
to select the most effective means
to beat the benchmark. At this
critical step the trader has the
ability to create alpha in their
execution through various means
such as pre-trade market impact
analysis, market timing, broker
selection and algorithm choice.
“It is necessary to try new bro-
kers and new algorithms to fur-
ther improve our processes,” adds
Nicholls. “If we didn’t do this, we