Measuring the Unmeasurable?

“Somebody said it couldn't be done”
Edgar A. Guest


At a recent fixed income conference, the title of the obligatory TCA session was ‘measuring the unmeasurable’. There are many in the industry that still hold this view, and that traditional TCA is either not relevant or impossible to measure within Fixed Income. However, at BestX, we would prefer to think along the lines of ‘some of it isn’t measurable, but for a large proportion of the Fixed Income market, it is possible to generate some meaningful analysis that can add value’. Admittedly, not as snappy a title for a conference session, but a fair reflection of the reality of the current status. In this article we draw on our own experiences of expanding our BestX product across Fixed Income to highlight some of the issues and how we’ve tried to address them.

There are many hurdles to leap when attempting to build viable analytics to measure TCA for Fixed Income markets. To begin with, it is worth clarifying that in our view, TCA is a somewhat misleading term. We see measuring transaction costs, in the traditional TCA sense, as an essential component of an overall suite of best execution analytics, that seek to add value across the lifecycle of the trade and best execution process. But only a component.

Let’s return to first principles and recap on what best execution actually is. Not in terms of the formal regulatory text definition but in practical terms, what does it really mean? We distil the essence of best execution into the following 6 bullet points:

1.      Best execution is a process
2.      Covers lifecycle of a trade, from order inception, through execution to settlement
3.      Requires a documented best execution policy, covering both qualitative and quantitative elements
4.      Process needs to measure and monitor the execution factors relevant to a firm’s business
5.      Any outlier trades to the policy need to be identified, understood and approved
6.      Requires continual performance assessment, learning and process enhancement, i.e. a best ex feedback loop

Ok, so if we agree this is what we are trying to achieve in order to deliver upon our fiduciary responsibility to asset owners and our desire to optimise performance, it is clear that a simple pdf or Excel report with a single cost number, measured versus a single closing price of the day, is not going to be sufficient. Clearly a technology solution is required, that can be configured to an institution’s specific business, trading protocols and best execution policy. This solution needs to measure the relevant performance factors, automate the outlier monitoring process and provide flexible, interactive reporting analytics to dive into performance results to seek areas where additional value can be extracted.

Data Issues

Within such a solution, as accurate a measurement of cost as possible is obviously extremely important, and this was the first challenge we sought to tackle in our expansion to Fixed Income. For non-Fixed Income people, it may not be obvious why this is such a challenge so for fear of stating the obvious, it is all about market data availability. The issues here are numerous, for example:

-         Coverage
-         Timeliness
-         Cost
-         Quality

Now, we were hoping, as were many others, that the sunlit uplands post-MiFID II were going to be filled with overflowing volumes of cheap, if not free, market data that all market participants could readily delve into. This has not transpired. However, there are sources of quality, timely data available, at a price, and this is where we turned. We didn’t want to build a Fixed Income product that wasn’t commensurate with the quality of our award-winning FX product, so high quality market data was essential. However, given the sheer breadth and complexity of the Fixed Income market, where there are millions of securities traded around the world, there are always going to be gaps. Such gaps may be short term due to, for example, new issues, or more structural, for example, complex structured sections of the market just don’t trade in the conventional sense. This required thought when building the trade parsers and analytics engine to mitigate gaps in market data coverage and quality, a challenge made easier given the modern cloud-based technology stack we are working within at BestX.

With the best market data available, and applying innovation to the analytics, there is still the need for a healthy dose of pragmatism when measuring transaction costs in Fixed Income. Indeed, a client recently told us that in Fixed Income “a price is not a price, it is simply an opinion”! There are always going to be highly illiquid sections of the market that do fall within the unmeasurable category, but we have found that it is possible to construct accurate measures of mid for the vast majority of bonds. This then, obviously, allows decent spread cost numbers to be measured for a given time stamp(s).

Time stamps. Another data issue altogether, although one we are familiar with from FX land. Fixed Income execution is becoming increasingly electronic and automated, a required development as buy-side execution desks are increasingly asked to do ‘more with less’, with traders having to execute more tickets, become responsible for more products and develop experience in more execution protocols. From the analysis we have done so far, time stamping for trades executed over the various MTFs all look pretty robust, as you would expect. Issues tend to arise in voice executed business, although here the quality of time stamps is improving post MiFID II. It goes without saying but we will say it again anyway, it is impossible to measure anything accurately without a decent time stamp.

Issues around data accuracy: trade data, time stamps, market data and benchmarks appear to be the number one priority for clients when research surveys are conducted. Getting all this as right as possible is deemed much more important than, for example, automated connectivity with EMS/OMS platforms, at least for now. We obviously expect this demand to rise going forward once the basics are in place.

Making it actionable

Another of the common complaints around applying TCA in markets such as Fixed Income is ‘what do we do with the output?’. Measuring a simple cost number on an infrequent basis doesn’t lend itself to making any such analysis actionable. This is why it is key to implement any TCA metrics as part of a best execution workflow and lifecycle.

Back in October 2016[1] we talked about feedback loops in the best execution process and applying the concept of marginal gains to improve performance. There are many decision points in the execution process where additional data-driven evidence can help the trader make a more informed decision, for example:

-         What time of day should I trade?
-         What size of trade should I execute?
-         Who should I execute with?
-         Should I trade principal or request the counterparty to act as agent for my order?
-         If I trade principal, should I trade via the phone or electronically?
-         If I trade electronically, which platform should I trade on?
-         Should I hit a streaming firm electronic price, or should I trade RFQ?
-         If I RFQ how many quotes should I request?
-         How quickly should I trade?

To ensure any output from your Fixed Income analytics can be actioned it is essential to have the following components to your TCA/best ex platform:

1.      Intuitive, graphical interface which allows large data sets to be queried and filtered quickly
2.      Enough data to make the performance results significant
3.      Timely information and analysis
4.      Ability to get into detailed diagnostics on a trade by trade level if required

We were already aware how important the last point was whilst building out our FX product. However, Fixed Income, with its more complex analytics, has increased this requirement even further. For example, it is imperative to be able to understand where a specific cost number is coming from, down to an understanding of which benchmark bonds were used to construct the yield curve if there weren’t sufficiently non-stale prices available in the specific security.


So, is Fixed Income TCA measurable? For a large part of this diverse and complex market, we think it is. Is it perfect? No, but our philosophy has always been to be pragmatic, rigorous and thoughtful when building what is possible under the given constraints. Getting such a first iteration out and used by clients allows us to evolve and improve over time, whilst at the same time hopefully benefitting from improved availability, quality and coverage of market data. For example, who knows, but a Fixed Income Tape, as mandated by MiFID II, may even appear one day.

To quote Edgar A. Guest’s tremendous poem again,

Somebody scoffed, "Oh, you'll never do that
At least no one ever has done it."
But he took off his coat, and he took off his hat,
And the first thing we know, he'd begun it.

With a lift of his chin and a bit of a grin,
Without any doubting or "quit-it".
He started to sing as he tackled the thing
That couldn't done. And he did it. 

Ok, in true BestX style, there hasn’t been a lot of grinning, and certainly no singing, but we have done it.