Westborough, MA and NY, NY, July 20, 2005 â According to a new report issued today by TABB Group, "From Best Ex to Coaching: The Future of Transaction Cost Research", as buy-side institutions improve upon and move past Volume Weighted Average Price (VWAP), the standard metric for comparing one firmâs performance to anotherâs, transaction cost research (TCR) will play a critical role in this shift by highlighting the relationship between benchmarks and enabling more effective electronic executions.
With trading growing complex and precise, managers with varying investment styles use TCR to prove their firm meets fiduciary obligations, regularly evaluating brokers, managing relationships and enhancing the firmâs performance. "Today," explains Adam Sussman, senior consultant at TABB Group and report author, "buy-side firms are still trying to determine the most effective method to seamlessly integrate and embed TCR into the trading process without miring traders in âanalysis paralysisâ."
With TCR being absorbed into the trading process instead of standing outside of it, TABB Group projects that 91% of all buy-side firms will adopt TCR by 2007. However, the expected high adoption rate does not mean necessarily that firms are satisfied with their transaction cost toolsets. Traders want TCR to not only measure trading efficacy, they want to know where they were and when they were effective, where they werenât and how to improve the process in the future.
"Essentially, this focuses on post-trade versus pre-trade cost analytics, measuring past performance versus estimating future costs," writes Sussman.
Investment managers have begun funneling a phenomenal amount of order flow through trading algorithms designed to achieve, match or better standard trading benchmarks. The result, Sussman explains, is that liquidity has been broken into bite-sized segments and the ability to trade size has diminished.
Financial IT firms are developing a number of client-driven enhancements. Measurement tools will be embedded into other trading components, most notably the Order Management System. Customizable views and multiple metrics will make TCR more user-friendly and useful. "An increased reliance on measuring transaction costs is driving demand for faster delivery, including real-time analytics," says Sussman.
Adds Larry Tabb, TABB Group founder and CEO, "Finally, pre-trade cost analytics will bring the process full circle by helping firms prevent mistakes instead of just identifying them."
The report also covers definitions of pre- and post-trade transaction cost research; how it is changing the trading paradigm; four future developments trends; and vendors delivering macro and micro solutions.