TCA takes hold in Australia A focus on controlling costs given recent market conditions has kick-started a new wave of adoption of TCA in the Australian and Asian markets, and the benefits quickly become clear. An analysis of costs for trading Australian equities over the past year illustrates how volatile market conditions have resulted in a wide variation in the cost of an ‘average’ trade. In dollar value terms: the average cost of trading a basket of ASX equities went from 43 basis points (bps) in July 2008 to 119 bps in November 2008 at the height of market volatility – an increase of 176 per cent.
Therefore each time a fund manager traded a US$5 million basket of Australian equities, the average cost may have been approximately $59,500 in November 2008 compared to only $21,500 in July 2008 – an increase of over $38,000 every time. This variation is not at the level of the visible commissions, which have remained relatively stable, but at the level of the hidden costs, which are directly affected by factors such as market turnover and bid/ask spreads. Most interestingly, in addition to the rising cost of an ‘average’ trade, greater market volatility resulted in the standard deviation of costs soaring – i.e. the more volatile the market, the more the likelihood of a trade being an ‘outlier’ incurring costs far from the average.
Understanding how much trading is actually costing has rarely been more important, and TCA can help managers and traders identify and control costs in the context of these market conditions. The future of TCA – incorporating results into the investment process Taken in isolation, TCA is a useful tool to measure costs and trading performance after the fact. However, where it adds real value is when the results are incorporated into ongoing trading processes in a cycle of continuous improvement. TCA can provide meaningful information and analysis throughout the investment process that can be acted upon to make informed strategy choices in the face of different market conditions. • The data can be factored into bespoke pre-trade modelling tools to gauge anticipated costs and review investment decisions in light of those likely costs.
For example, if a stock is likely to be very costly to buy in terms of trading cost due to market conditions, can it be replaced in the portfolio by a different stock with similar investment characteristics but lower trading/ acquisition costs? • Workflow can be changed to improve processes. For example, delays in compliance approval processes on investment decisions can result in significant cost impact which, when identified, can be addressed. • Trading tools, whether they be broker desks, algorithms or alternative trading venues, can be monitored to quantitatively identify their value and allow selection of best of breed providers.