NEW YORK — As regulators in the United States and Europe push the notion of best trade execution to center stage, transaction cost analysis also could find itself in the spotlight, industry players say.
At first blush, one might think the need for transaction cost analysis would be unnecessary in an era in which — under Regulation NMS in the U.S. and Europe's Markets in Financial Instruments Directive, or MiFID — price becomes the key factor in determining whether to execute a trade.
However, several sources said transaction cost analysis is likely to be embraced by even more people in the investment community thanks to an overall increase in the scrutiny of trades, both before and after they are executed.
Harrell Smith, manager of the securities and investments group at financial services consulting firm Celent LLC, New York, noted that with stock trades being completed in smaller and smaller chunks these days, it will fall to broker-dealers to develop trading algorithms that pull together all kinds of liquidity information to ensure best execution.
"That is going to present a number of challenges to the sell side" or the broker-dealer community, Mr. Smith said. Transaction cost analysis will help "evaluate how the sell side navigates that environment," he said.
This appreciation for transaction cost analysis marks a switch from just a few years ago, when obtaining transaction data was regarded as little more than a compliance matter to which few people paid attention. Though compliance rules required many institutions to perform transaction cost analyses, several people said many institutions have long regarded it as little more than a perfunctory, or so-called "check the box," task.
"Some people are still looking at TCA as an afterthought," said John Wightkin, co-founder and managing partner of Quantitative Services Group LLC, Naperville, Ill. "Many folks don't mind checking off the box and moving on."
However, Mr. Wightkin and others noted that has started to change as investment executives begin to realize the value of transaction cost analysis.