It's all about Transaction Cost Analysis you fool

Transaction Cost Analysis is the new 'cause célèbre' for alpha-conscious buy-siders, their trading counterparts and freshly minted CFAs, the world over. More and more buy-side firms are asking for and getting access to, broker tools and TCA models, without having to make any commitments towards funneling trades back to their providers! They get to cherry pick the analysis and go with the most cost effective execution avenue at their disposal.

As for the brokers, the rush to expose their proprietary TCA models and algorithmic trading tools to the buy-side is a sure sign of how desperately they are trying to retain their client base. Fully suspecting that once the knowledge is transferred and with their own set of tools in hand, those same clients will ultimately be driving towards DMA sized commissions!

The question to ask here is this; if a buy-side desk had access to working execution strategies and direct connectivity to the sources of liquidity, would they be paying their brokers any extra for trade execution insight?

Broker sponsored TCA will remain all the craze until the buy-side feels comfortable enough walking around in their own sell-side-imitation shoes. Until then, if they can't gleam meaningful trading ideas from it, they can always swing TCA about as the menacing performance-evaluation stick it was meant to be.

Meanwhile and in absence of a meaningful payoff, the quality and performance of the free tools will degrade markedly which brings us back to the inevitable conclusion that the buy-side has no real choice but to develop their own tools and original ideas.

As for the sell-side, agency execution revenues and the cost of supporting DMA clients have nowhere to go but sharply down for the first and equally up for the second. However that is a topic for another post...