http://fixglobal.com/content/standardising-tca
Mike Caffi, VP and Manager of Global TCA Services, State Street Global Advisors, and Mike Napper, Director and Head of Global Client Analytics Technology, Credit Suisse and EMEA Client Connectivity Technology, Co-Chairs of the FPL TCA Working Group, examine the motivations for, and the progress of the TCA reference guide.
What is the history of the FPL TCA project?
Mike Caffi: The industry has been lacking in any kind of standards for TCA, and that’s not a new problem. I have seen some really good TCA white papers over the last five to 10 years that have tried to address the subject, but eventually these fade on the shelf because there is no follow-up support or interest. What we’ve always needed was some independent group to be able to take ownership of this, but how does one get that started? It never really came about until about a year and a half ago, in September of 2011, with the formation of the OpenTCA group. The group was a collaboration of four sell-side firms in London and EMS and TCA vendor TradingScreen, which was the glue that put them all together.
When I read their white paper I got really excited because I saw a group of individuals who were trying to promote at least what appeared to be an essence of a global standard. They held a conference in London, and then they came to Boston and I contacted the person who was heading the public relations at TradingScreen. They invited me to be on a panel to talk about the benefits of standards, and that was in November of 2011. At this meeting TradingScreen had really tried to move this along, but I saw the need for a larger group to really take on this challenge as well. So that’s where I felt a group like FPL would be perfect.
As a matter of fact, when I was at the conference, I related this back to the early beginnings of the FIX Protocol when I was involved 15 years ago. We needed the collaboration of industry participants within a neutral body such as FPL, to take ownership of TCA standards. I even posed that question to the audience: “who would be willing to form a group, putting up a small amount of money just to get the essence of a working group together?”, but there really wasn’t much reaction at that particular time. Given that the holidays were approaching I decided to let it simmer down until after the New Year.
By early March I contacted John Goeller, FPL Americas Regional Co-Chair, and ran the idea by him to see if FPL would be interested in hosting a TCA Working Group. John liked the idea and soon after he ran it by the organisation’s Global Steering Committee, who also thought it would deliver strong industry benefit and liked the idea. From there, FPL leaders opened discussions with TradingScreen and due to strong FPL member firm interest in addressing some of the key business issues impacting the TCA environment, it was agreed that FPL would create a TCA working group. Representatives from Trading Screen joined this parallel activity.
So it was agreed to put out a call for participation, and on the first pass we had about 70 people sign up. We had our first meeting in June of last year, and that is when we got traction; at that point it was really pretty much driven by consensus, which evolved into a survey that allowed us to prioritise our objectives. That gave us greater focus and direction on what to do and, from that survey, we could see that with 70 or 80 people, we needed to break out into smaller groups.
The number one issue highlighted in the survey was terminology and methodology, and as such it was decided that our first working group should focus on coming up with standardised definitions for TCA in the equity space. This has taken some time as we wanted to take a slightly different approach, not writing a white paper, but more of a working reference guide. That project has been our focus for the last four or five months and right now we’re at a point where individuals are actually finalising the more difficult aspects of that document.
Last September, I said it’d be great if we can have this all done by the end of the year, and that was just a bit presumptuous on my part. Now I realise this is going to take quite a while to produce as there is a lot of work involved, and this is just the equity space. We’re going to look at multi-asset class perspectives of TCA after that.
Mike Napper, would you like to give a brief overview of the reasons behind your involvement?
Mike Napper: I’m interested and involved in this initiative from two perspectives. Firstly, I head Credit Suisse’s Global Transaction Cost Analysis Technology, both pre-trade and post-trade. Secondly, I also head FIX Client Connectivity for Credit Suisse in EMEA, for Equities, FX and Listed Derivatives, and thus have exposure to the FIX Protocol and FPL.
In 2Q2012, I was invited to help lead this initiative as the sell-side co-chair and I was very happy to contribute. The standardisation will help everyone in the market. It will help clients by providing more clarity on the reports they’re reading. It will help brokers and third party vendors by providing a consolidated reference guide explaining the principles and methodologies to all stakeholders. Firms are doing a lot of creative and original technical analysis, but there isn’t consensus in all cases on some of the basic stuff, and that’s an opportunity.
An area of particular interest, with both my TCA and FIX hats, is the convergence of asset classes onto electronic trading over time, providing greater automation and transparency. We can agree some foundational definitions for what TCA means in a multi-asset-class sense. We have started with a set of Equities definitions, to clarify and standardise what’s already out there and in most cases mature. Then, we’ll expand and mature the definitions across asset classes, where in some cases there is less existing consensus.
How are you unifying the different definitions that each market and regulator has, on areas such as the consolidated tape?
MN: The consolidated tape is an area where Europe has lagged. MiFID created the market fragmentation: this has been good for the industry’s efficiency and has promoted competition and innovation. Yet it left us with challenges on the market data side, notably with respect to TCA. We all spend time and effort re-assembling what we think is the best representation of a consolidated tape, from fragmented data, and using our own views of which venues and liquidity types to include. These varied approaches can cause confusion. We are not in this TCA process to solve the lack of a consolidated EMEA tape, other groups are working on that, but we can provide some guidance and standardisation on how best to handle the fragmentation.
MC: From the overall results of the survey, the consolidated tape was at the very bottom of the list. I think it’s not that it was the least concern on the survey, but rather the one of which we’d have the least control. From those discussions, we have found that being within the FPL group has had its benefits because we’ve now been able to liaise with other teams that are working more closely on those types of projects, such as the EMEA FPL Trade Data Standardisation Working Group.
Computing VWAP is one area within the European consolidated tape that we can provide some guidance on. That’s where standardisation of TCA can help. And as Mike said, what liquidity sources should be considered to be used or excluded. That’s where standards get tricky as you may need to structure VWAP in a certain way for your own internal reporting, so this becomes more of guidance than an absolute. Also part of what I see from the reference guide is to provide guidance on when it is best to use VWAP, and when it is best to use a point-in-time reference such as an arrival price or any other type of benchmark, and what are the results that you get and what the meaning behind that is.
I think we can help educate the recipients of TCA to better understand what it is they are receiving, or to know when to ask questions. The OpenTCA paper provided a number of excellent exhibits to help guide the selection of a provider and/or interpretation of 3rd party TCA. There are many approaches to TCA and the results can be misleading if you are not aware of the methodology that is being used.
What comes next, once it is finalised?
MC: My intent is to make this a living document that will adapt as the markets evolve over time; I don’t want it to be one of those things that gets put on the shelf and forgotten.
MN: We hope to think of it as building something like the FIX Protocol; it will continue to be refined by the participants and the users of it through consensus and the governance presented by the FPL process.
MC: I think there’s another aspect that came out of the survey results, and I think this is where my Co-chair has a lot of strengths, is that there is the TCA perspective, but there’s also going to be some overflow into the FIX Protocol space. I think that’s where Mike Napper has much more expertise than I do because it’s part of his day-to-day work and he understands the Protocol in terms of what we need to adjust. There have been some ideas for potential enhancements with the introduction of further standardised tags to the FIX Protocol to make TCA more robust within the FIX realm. Mike Napper will lead this work stream and look into the FIX related aspects of TCA, once we get beyond the basics.
MN: What tends to happen is that many instructional fields from clients to brokers may get defined on a custom per-broker/per-vendor basis. Thus we have a wide range of custom tags in operation. If we can get some consensus around, say, the 10 key pieces of information that you need to capture around each order, to provide a standard and robust TCA computation, then we can look to embed those as standard tags in the FIX Protocol. We’re still working on finalising the consensus around core TCA methodology and definitions, so we’re not yet looking at the implementation of FIX tags… but that will come.
Is that where you’d say your biggest challenge to date has been, with the definitions, the methodologies and deciding how to go forward? What is the timeline?
MN: Definitions and methodologies came out of the survey as the top concern. So we started there.
MC: The challenge right now is trying to get break-out group documents into a usable form, and in doing so I’ve already found some gaps that we left out or we need to rethink. This is going to set the tone for the other asset classes and beyond, so I’d rather spend the time now to get the first version right and then watch everything else fall in place instead of trying to rush it out the door. I don’t want to find that we have to redo the whole thing once we start trying to develop a fixed income document.
MN: And we’re also kicking off the Fixed Income TCA stream. With these different subgroups, we’re making sure we get participants who have expertise on the particular subject matter. So there will be some new faces coming in, with Fixed Income expertise, but we will be ensuring we apply the lessons learnt in equities to this space.
MC: Completion of the documentation is very important to us, but perhaps more important will be acceptance and adoption by the financial community. Beyond that, it is our vision that this work will find a permanent home within the standards community so that it can be maintained as needed to serve as the go-to source for TCA standards and best practices.
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