For traders and investors, slippage – the adverse difference between the expected price of a transaction and the executed price – is essentially a double four-letter word. Possibly the only thing worse than trade slippage is a lack of information ex post facto regarding why the trade didn’t go according to plan.
Markit aims to fill in this information gap and then some. The financial information services concern breaks down its Transaction Cost Analysis in a way that other providers don’t, according to Henry Yegerman, New York-based director of analytics and research at Markit.
“We’re able to match every fill with the tape, and we do this globally,” Yegerman told Markets Media. “This allows us to decompose, or do an attribution analysis, inside of overall slippage. Where everybody else just gives you a slippage number, we break it up into the market impact cost, the market timing cost, and the opportunity cost, which are the components of slippage.”
The methodology enables Markit to identify the portion of the trade cost resulting from the trader’s own concession for liquidity for an institutional size order, versus the cost resulting from the actions of other market participants. The premise is, that quantifying the cumulative price impact of one’s own activity is the most meaningful metric to examine when seeking to improve trading performance.
TCA of years ago tended to be too broad – it would provide an overall high level view of fund performance, and what was the cost of implementing an investment idea for a portfolio. However, Yegerman said “that proved fairly useless in terms of providing meaningful actionable ideas for traders, or in terms of being able to evaluate brokers, or trading strategies, or a variety of other questions other than just pure slippage.”
Markit’s TCA is deployed by buy-side and sell-side market participants in more than 85 countries, trading on more than 250 exchanges.
“We give clients real, actionable ideas that they can empirically test to improve their performance,” said Yegerman, who worked at ITG, Reuters and Morgan Stanley before joining Markit in 2012. “We do this for the buy side, and for the sell-side firms that use us on a ‘white label’, outsourced basis.”
“We were able to democratize TCA, in a way, because this is the kind of analysis that large sell-side banks, like Goldman Sachs or Deutsche bank, do on a one-off basis for their biggest clients. This is at the heart of their execution consulting process, and we’re able to bring this level of data and venue-level analysis to all of our clients, no matter how big or small they are.”
In 2014, Markit improved its TCA product by providing more detailed venue-level and order-routing analysis, especially in light of issues and heightened scrutiny on U.S. equity market structure. In 2015, the company is developing a new TCA infrastructure that will include fixed income and derivatives. “We’re preparing to go fully multi-asset class,” Yegerman said.