Written by Jason Dibble, Co-Founder and Editor in Chief – Published by https://curatia.com/

07 October 2021

With valuations in US and European markets looking stretched, investors are increasingly eyeing opportunities elsewhere. The shift, combined with a pandemic-era cost-cutting push and mounting regulatory pressures around the globe, has traders turning to transaction-cost analysis in hopes of gaining an edge.

Compliance and trade analytics firm S3 is poised to address that need when its new international TCA offering drops at this week’s Security Traders Association conference in Washington, DC.

Surging Demand

Potential future opportunities in international markets, heightened regulation, and a growing pandemic-era emphasis on cost cuts are stoking interest in transaction-cost analysis.

Stretched valuations in the US and Europe, expectations that the pandemic recovery will take eventually seep into emerging markets, and the recent pullback in China that obliterated $1T in value have investors casting a wider net for new investing opportunities.

Trading firms are also expanding internationally, with BlackRockJPMorgan, and Deutsche Bank all launching or recommitting to strategic initiatives in China in recent weeks.

TCA will be key to making the most of such opportunities as they present themselves in markets less liquid, less regulated, and subject to greater volatility than those in the US.

A surge in global regulatory activity is meanwhile boosting firms’ incentives for showing regulators they’re playing by the rules. The UK and Europe are mired in a budding post-Brexit regulatory rivalry even as European rulemakers mull MiFID II tweaks. In China, regulators are cracking down on everything from political activism and crypto to video games.

TCA offerings allow firms to evaluate their brokers’ performance and show regulators they’re adhering to best-execution obligations on behalf of their clients.

Other industry developments figure to enhance TCA by deepening access to trade data. Efforts to construct consolidated tapes in Europe and the UK are gathering pace. In fixed income, surging electronification is yielding reams of new data. That data in turn helps firms execute fixed-income trades electronically with greater efficiency, yielding more data and stoking a virtuous cycle.

Those dynamics are helping to make 2021 “another strong year of TCA adoption and interest in third-party providers who will seek to offer increasingly advanced techniques,” according to Coalition Greenwich.

Already in Q1, 78% of respondents to a Greenwich survey of equity traders in North America were using third-party TCA vendor tools, highlighting an increasingly universal embrace of the approach. Still, just 38% of fixed-income trading desks employ TCA — a sign of considerable growth potential in the sprawling bond world.

Despite TCA’s broad-based uptake, bullish outlook, and cost-saving potential, it remains little discussed in financial media.

Global Perspective

Compliance and trade analytics firm S3 aims to change that when its new TCA solution for international markets drops this week at the Security Traders Association’s 88th annual market-structure conference in Washington, DC.

S3’s International TCA tool compares client executions to a wide array of benchmarks and algorithms, allowing firms to evaluate trading strategies for achieving best execution in all jurisdictions across the globe. The product supports domestic firms executing outside the US as well as non-US firms executing worldwide in equities, options, and fixed income.

S3 has already established itself as an industry leader in helping sell-side clients use Rule 606 disclosures to demonstrate fulfillment of their best-execution obligations to both regulators and their clients. Now the Austin-based fintech firm is extending that expertise to the world of TCA, bolstering its existing domestic offering with an expansion into the international sphere.

Known for working closely with clients to deliver focused, end-to-end solutions to key pain points, S3 collaborated with one of the world’s leading global banks to develop its international TCA offering. In fact, the bank initially pitched the project to S3, saying its domestic TCA offering met the bank’s needs “perfectly.”

Flexible Solution

S3’s International TCA tool sports the flexibility to support a range of use cases. Firms can review their overall execution quality from a high-level summary perspective or drill down into individual executions for review, according to S3 CEO Mark Davies.

In keeping with its client focus, S3 is known for its user-friendly portal, which empowers clients to generate custom reports that can then be scheduled for delivery via email or FTP.

Unlike many TCA providers that require data to be in a consistent format across all sources, S3 can also accept client data in various formats across data sources, extending the solution’s flexibility. That differentiator is growing in importance as trading desks seek to incorporate data from more sources to gain a more holistic view of their execution options in real time.

The TCA tool’s flexibility will help it appeal to both large firms seeking to minimize the cost of executing block trades and smaller firms looking for a robust yet affordable solution to compete with larger rivals’ advantages in scale. In both cases, the TCA tool is a key piece in the best-execution puzzle.

The solution is timely. An August report from capital-markets consultancy GreySpark Partners found that smaller buy-side firms “are struggling to compete effectively” with larger asset managers and investment banks with the budgets to “deploy resources for effective analytics across asset classes.”

“We aim to support the whole market — large and small, domestic and international — with our TCA tool and our solutions more broadly,” Mr. Davies said.

“It’s also more than that. Our commitment to working closely with our clients to meet their needs builds a feedback loop into our TCA tool that will keep improving the product. We believe unlocking that virtuous cycle is a core principle of outstanding product development. It’s the best way to deliver superior value to our clients in an area that will be a strong focus of sell-side and buy-side firms alike for years to come.”