By Flora McFarlane.
Traditional transaction cost analysis (TCA) could be a casualty in the shifting landscape of pre- and post-MiFID II regulation, with 39% of buy-side firms rethinking their use of TCA to deliver best execution due to the lack of a viable fixed income option, according to a Liquidnet survey of over 50 trading heads at asset management firms.
The report, ‘Re-Engineering Best Execution’, published today, has analysed how traders will respond to the shift in liquidity provision, broker/trader relationships, and the incoming best execution obligations. With a dearth of reliable data streams in fixed income, firms will be forced to look elsewhere for data provision.
Rebecca Healey, head of EMEA market structure at Liquidnet said “The hope was that vendors would come up with viable TCA products, so firms are having to think around the structure. They are being more creative about how they get to the end game, rather than relying on vendors to deliver off-the-shelf products”.
The industry has begun to see a shift towards more holistic best execution analysis, and the survey indicates that firms are rethinking whether TCA is the best tool, given the lack of credible data to be found in fixed income in the current market.
Michael Sparkes, head of business development at broker, and TCA provider ITG Europe, said that although TCA in fixed income has historically been less developed, partly because of the lack of good market data, there is some to be found, and with MiFID II, data availability is only set to increase.
“It will improve over time, with buy-side demands, expectations, and pressure accelerating the process. People are exploring ways in which they can, and should, use TCA”, Sparkes said.
The obligation to provide quantifiable evidence for best execution is seeing some firms building their own data warehouses in-house.
Tom Driscoll, managing director of global sales at front and middle office software solutions provider, Charles River, identified problems that are currently facing the buy side as a result of the current offerings from data vendors,
“I’m surprised vendors haven’t offered a more comprehensive solution, and some of the vendors with the specialty data required are making it prohibitively expensive, using data as a way of drawing buy side firms to their complete platform”.
The report showed that buy-side firms are evaluating data and liquidity providers, with 70% of the asset managers surveyed now reviewing new liquidity providers outside of current broker relationships
ITG’s Sparkes acknowledges that for best execution or effective trading processes where there is a lack of data, a different sort of approach is required, such as looking at where to source liquidity.
However Healey hinted at the likelihood of a post-MiFID impact on market data levels, as the feedback loop from regulatory changes becomes more established
“The surge in data that we’re going to get from increased reporting will help firms to mine data far more intelligently and to add real value to the execution performance”.
She said that those who are best prepared at the moment – just 6% of asset managers said they feel ‘ready’ for MiFID II – are those who acknowledge the level of change that the regulator is looking for, aiming to systematically deliver best execution.
Healey also revealed that firms are already reporting strategy changes as a result of data that they are collecting, understanding the impacts of factors such as the timing of orders on fund performance.
It is likely that those under the pressure of meeting MiFID II will reap the benefits, and even those not directly affected by regulatory change are looking to adapt to the changing market, with Driscoll saying that Charles River has been advising clients from Japan and the US about the effects of MiFID II.
Healey believes that it is in fact those firms that come under MiFID II that will be best served in the future, despite the current challenges.
“It’s going to be worth it in the long haul, it’s just a painful process at the moment, but the benefits of better execution will outlay the costs that the firms have to take in the meantime”.