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Tabb Group says use of equity transaction cost analysis will reach 90 per cent next year

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Use of equity post-trade transaction cost analysis by US and European firms will reach nearly 90 per cent by 2009, with 38 per cent of those firms examining transaction costs every day, ac

Use of equity post-trade transaction cost analysis by US and European firms will reach nearly 90 per cent by 2009, with 38 per cent of those firms examining transaction costs every day, according to a new report by research and consulting firm the Tabb Group.

Nearly two-thirds of US and European equity firms now spend more than USD100,000 a year on transaction cost analysis, and after including internal development costs, larger firms now spend an average of USD200,000 a year, according to the report, Imperfect Knowledge: International Perspectives on Transaction Cost Analysis,

Outside the cash equities marketplace, Tabb Group says 58 per cent of US buy-side foreign exchange traders have already attempted to measure execution quality and transaction costs, while 25 per cent of equity options traders now use an internal model to track their execution quality and transaction costs.

‘Usage [of transaction cost analysis] is far more widespread than other oft-cited components of modern-day trading like algorithms, execution management systems and crossing networks, because the desire to measure performance cuts across nearly all trading styles, investment strategies, locations and asset classes,’ says Adam Sussman, Tabb Group’s New York-based director of research and the study’s author.

‘Today, it really doesn’t matter if you’re a trillion-dollar, quantitative mega-manager or a classic, bottom-up stock picker with USD50bn in assets – both scrutinise their post-trade transaction cost analysis at least once a week. The desire to measure is no longer a trend but a full-blown staple of asset management – and the story has only just begun.’

But Sussman note that while regulation and transparency are the keys to enabling more precise execution measurement, the benefits of transaction cost analysis are still contested. Nearly a quarter of those interviewed saw volatility as the main driver of unavoidable transaction costs, while others cited order size and a stock’s liquidity.

In Europe, he says, ‘the small number of traders still free from the impact of transaction cost analysis is dwindling as MiFID exerts its influence. As usage spikes, we expect European transaction cost analysis will become more accurate as reporting requirements force more trade information into the public domain.

‘But the changes in how execution quality is measured hardly ends there. The entire European market micro structure is about to undergo a sea change as new execution venues threaten to fragment liquidity and introduce new business models requiring traders to revisit trading strategies and costs.’

The report also found that nearly 75 per cent of firms evaluated traders against transaction cost analysis, but others believed that measuring individual traders was ‘a slippery slope to a mercenary environment that discourages teamwork’.

Nearly 25 per cent of equity trading firms believe transaction cost analysis should be used to help determine compensation for traders and firms that already do so base up to 20 per cent of bonuses on it, but nearly 80 per cent of firms oppose to the idea.

For the report, the Tabb Group conducted interviews with 137 buy-side traders, with a slight edge to US equity traders, and 22 foreign exchange professionals, in organisations including investment banks, hedge funds and traditional asset managers.

Founded in 2003 and based in New York and London, Tabb Group is a research and strategic advisory firm focused exclusively on capital market. It uses an interview-based research methodology developed by founder Larry Tabb to analyse and quantify the investing value chain linking the fiduciary, investment manager, broker, exchange and custodian.

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