The Essential Elements of Actionable Transaction Cost Analysis
Through a more comprehensive TCA process, ever-increasing quantities of transactional data can be combined with experience and skill to ensure firms maximize their realized returns.

Periodic post-trade reports are an undeniably helpful tool for improving trading performance. If used in isolation, however, they can create more questions than answers and lead to frustration with the process of transaction cost analysis.


This frustration is justified, given that reports represent only one element of an effective partnership between an execution consultant and an investment agent (portfolio manager, trader, or broker). The many different interpretations of the ever-elusive “Best Execution” highlight just how comprehensive a quality approach to reducing trading costs must be. Though there are innumerable small steps involved in providing a top-quality transaction cost consulting relationship, they can be loosely grouped into four main phases:

1. Record data with a high level of detail and precision in order to accurately identify decision timing and content at every step in an order’s life cycle.


2. Measure the performance of investment agents in a comprehensive manner and compare to a variety of benchmarks to analyze trades in the context of the market as well as from each investment agent’s perspective.


3. Attribute each agent’s costs to underlying causes, and split costs into explicit, implicit, delay, and opportunity cost in order to gain further insight into the drivers of performance.


4. Evaluate & Monitor agents through frequent personal consulting conversations to establish goals and create a plan to achieve them, then maintain a regular dialogue to facilitate continuous improvement.



Statistics are only as good as the data from which they are derived.  It is therefore essential that the earliest steps in the process receive a high degree of care and attention to establish firm groundwork for the subsequent, more visible phases.


High-quality transaction cost analysis should aim to improve trading at the level of individual decisions. This requires accurately recording the timing and content of every decision event in an order’s life cycle.  Financial Information eXchange (FIX) messages usually provide a consistent and highly accurate source of information for interactions between traders and brokers.


Data drawn from an OMS/EMS, however, are not as granular or as uniform as data from FIX, potentially leading to flawed conclusions unless a significant effort is made to address this concern. Therefore, OMS/EMS messages must be supplemented by both the more granular data available in FIX tags and communication with brokers, traders, and portfolio managers.



It is essential to produce a variety of measures and benchmarks for each agent.  The multitude of definitions for “Best Execution” and the dangers inherent in placing too much emphasis


on a single statistic such as VWAP necessitate the ability to compare agents to a diverse set of benchmarks. These comparisons allow costs to be split into four categories: “Explicit Costs,” “Implicit Costs,” “Delay Costs,” and “Opportunity Costs”. The accurate measurement of each of these costs is necessary to facilitate insightful and reliable decision management.



Reliable measurements allow decisions to be matched with observed outcomes. In the attribution phase, the four cost categories are broken down further, turning previously vague statistics into intuitive measures representing specific aspects of a trade. For example, application of a transaction cost model helps split Implementation Shortfall into impact costs and momentum costs. Proper attribution must also distinguish the influence of market factors (i.e. sector, region, market cap, and momentum) from that of human skill. If each step of this process is done diligently, the results should begin to provide insight into the true drivers of trading performance.


It is at this stage that the problems that can arise from incomplete data become clearly evident. For example, an incorrect determination of the time a trader gained control of an order could result in an unfair assessment of the performance reported for that trader, when in reality the problem may have resulted from a delay between the portfolio manager and the desk.

Evaluate & Monitor


By this stage of the process, high-quality recording, measurement, and attribution should enable an investment agent to begin drawing conclusions regarding what went well in past trades and what areas leave room for further improvement. However, investment agents and transaction cost analysis providers should not be satisfied quite yet. The essential final step in converting raw data into a plan of action is to have continued communication between consultants and investment agents once both sides are equipped with clear information. Both parties can contribute skill, research, and experience to create clear goals to improve performance.


While semi-annual or quarterly conversations may provide some benefit, the key to long term improvement and elimination of costly biases lies in regular discussion and monitoring. Even a short check-in on a bi-weekly or monthly basis can provide a valuable stream of reference points, allowing mistakes to be detected earlier and building on previous improvement rather than risking relapse into ineffective trading habits.



Successful trading is a process that requires careful attention at every step and analysis of its costs must be equally thorough. It is not enough for a transaction cost analysis provider to extract a few numbers from daily data files and send a report every three months. A full calculation of cost requires data collection to begin well before an order arrives at a trader’s desk in order to correctly frame trades within appropriate market conditions and understand decision timing.


Information must be gathered from multiple data sources, including FIX and OMS/EMS messages as well as conversations with those involved in the investment process.  This granular detail provides the necessary foundation to evaluate investment agents with statistics that see the market from their perspective. Attribution and regular consulting can help portfolio managers, traders and brokers turn these measurements into actionable insights.

Through this comprehensive process of transaction cost analysis, the vast and ever-increasing quantities of data available can be combined with the experience and skill of investment agents to ensure firms maximize their realized returns.


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