The Gateway to Algorithmic and Automated Trading

The search for efficiency

Published in Automated Trader Magazine Issue 28 Q1 2013

One of the notable themes to emerge from this year's survey data is the extent to which the search for efficiency has diversified. Of particular note are the statistics relating to Transaction Cost Analysis (TCA) and execution consulting. The survey r...

Brian Schwieger

Brian Schwieger

Managing Director Execution Services and Integrated Coverage & Execution, Bank of America Merrill Lynch

One of the notable themes to emerge from this year's survey data is the extent to which the search for efficiency has diversified. Of particular note are the statistics relating to Transaction Cost Analysis (TCA) and execution consulting.

The survey revealed the overwhelming majority of traditional asset management firms to be using TCA, and that 43% of them are using it to monitor the performance of their own internal traders. What stands out in the data, however, is how traditional asset managers are leading both the sell side and hedge funds, with only 35% of sell side firms and 14% of hedge funds reporting use of TCA for this purpose.

It was also interesting to see that traditional asset managers appear to have moved away from VWAP as their most common execution strategy, with over 73% now focusing on Implementation Shortfall. In sharp contrast, VWAP remains the dominant strategy for hedge funds and other proprietary trading firms. From our experience, the hedge fund results suggest a large usage of quantitative-based macro models from these respondents.

Execution consulting remains a relatively niche activity, with just under 13% of traditional asset managers currently making use of these services. The modest adoption rates might be explained in part by a dearth of offerings, as well as a gap between perception of the likely benefits and the actual experience of users. Of those not using the service, when asked if they believed that execution consulting might add value to their trading, less than 10% of any buy side category thought that it would. However, when a similar question was posed to current users of execution consulting services, nearly two-thirds responded that it had, with the remainder 'Unsure'. Significantly, no single respondent answered 'No'.

Further details on the survey findings can be found here