Europe has set some stricter standards for transparency in transactions. Indeed, regulatory requirements drove the multi-asset TCA (transaction cost analysis) in 2017. This meant that there were really big advances in derivatives, foreign exchange, and fixed income. Jonah Engler has watched these developments with great interest and is very happy about the improvements that it has made.
Jonah Engler on the New Regulatory Requirements
One of the biggest changes is the MiFID II and the PRIIPs. These were implemented in week one of 2018 and focused, specifically on brokers and investments. Under MiFID, transaction cost analysis has become a lot more interesting. Essentially, investors now have to be given the “best possible result” by their financial advisors, and this means costs have to be factored in as well.
For those in the business of making money with derivatives, currencies, and bonds, it can be really complicated to standardize the calculation of trading costs. As soon as a trader receives an order, they start by making a price discovery. Fixed income has less liquidity than stocks and this means that a trader has to look at many different dealer quotes and price sources before they decide to buy or sell. Doing so means that they are more informed about potential results, which is to the benefit of the client.
TCA is now also looking at the costs before a trade, instead of afterwards. This is a very interesting trend that creates a lot more transparency on the entire transaction as well. This may be very important during investigations and allegations, or when FINRA has to get involved.
What has also changed is that a TCA no longer solely measures the quality of the trading desk on the buy side. Instead, it now looks at the sell side as well. What this means is that it is far less likely for a trade to end up in debt, because all aspects have been investigated beforehand. It means that there is full transparency on where orders are going, and whether that is where the orders should be going as well.
Throughout 2017, trading execution got a lot better, which has been confirmed by numerous reports. There was much less volatility, and the price difference between receipt and execution of an order has dropped further. In fact, volatility dropped by 14%, which means markets are more secure than ever. This, in turned has enabled traders to wait and hold fire before making a final decision. And this was noticed in the fact that, in 2017, 73.7% of trades were completed between zero and nine seconds, a significant drop from the 75.9% it stood at the year before. And there was also a significant increase in the percentage of trades that take longer. For instance, in 2016, just 7.7% of trades took 60 to 299 seconds, whereas that climbed to 8.9% by 2017. Clearly, there are many positive developments to be aware of.