TABB Group Says Transaction Cost Research (TCR) is the Next Battleground in Advanced Trading

Major Study Unveils the Buy-side’s Views on Measuring Transaction Costs, Strengths and Weaknesses of Information and the Impact of TCR on the Asset Management industry

NEW YORK, NY, November 7, 2005 – In a major industry study released today, "Trading Under a Microscope: a Buy-side Perspective on Trading Cost Analysis", TABB Group believes that as measurements become more robust, estimated costs more accurate and integration with the OMS (order management system) more seamless, transaction cost research will become as common a tool as the Financial Information Exchange (FIX) Protocol – and that buy-side traders will come to view TCR, expected to be adopted by nearly 85% by 2007, as another piece of essential data, as critical to the trading decision as the National Best Bid or Offer (NBBO).

"Transaction cost research," writes Adam Sussman, report author and TABB Group senior consultant," is bifurcating. The traditional plan sponsor and best execution TCR focusing on regulatory mandates and plan sponsors are being augmented with pre-trade and real-time TCR helping the trader better understand the market." He adds that RegNMS, the interpretative release of soft dollars, CP176 and the shift from pension plans to the "401(k)" in the private sector will have major impacts on the regulatory and plan sponsor side of the market, while algorithmic trading and real-time data is having a direct impact on the trading desk."

The data-driven study, which draws on interviews of 53 buy-side participants at firms with a combined $US 5 trillion in assets under management (AUM) segmented into three categories, e.g., over $50 billion, $10 billion to $50 billion and fewer than $10 billion, reveals the buy-side’s opinion on the value of measuring transaction costs, strengths and weaknesses of information and the impact of TCR on the asset management industry.

According to the study, transaction cost research is also an integral part of the sell-side’s strategy to increase the size of their footprint on the buy-side’s desktops in that TCR is part of the glue binding electronic trading tools such as DMA, algorithms and crossing networks. Sussman adds, "Traders complained to us in interviews that the rather dizzying array of choices available to them can be an impediment to getting the trade done. Using TCR, we believe it can help traders navigate through the choices, pinpointing those strategies that have worked in the past. Furthermore, the sell-side firms that traders deal with the fragmentation of trading tools as well as fragmentation of liquidity will help themselves to more clients."

"Just as liquidity begets liquidity," says Larry Tabb, CEO at TABB Group, "information begets information and the availability of massive quantities of data and low-priced, high-performance computing platforms, as well as brokers fighting for buy-side algorithmic execution is pushing the accelerating advancement and importance of this field".

· More than 66% of buy-side firms believe TCR lowers transaction costs.

· ITG (ACE), Lehman Live, Stockfacts and Morgan Stanley have the greater share of the pre-trade TCR market, with Plexus, internal groups, ITG and Abel Noser strongest in post-trade TCR.

· Best execution goes beyond obtaining best price to creating and following a process that assures commissions are spent appropriately

· TCR provides buy-side firms with objective, third-party analysis of execution quality that they can show to regulators

· Feelings are strong about the inferiority of certain benchmarks, with VWAP absorbing the most criticism. The result is that most firms choose more than one benchmark because no one benchmark can measure different types of transactions equally.

· Building TCR into individual compensation packages could damage the team approach to a trading desk

· Head traders say it would be unfair to compare traders across different strategies

· TABB Group believes the buy-side’s increases in resources toward TCR will go to more high-touch consulting services and integrated into trading tools and independent pre-trade tools.

· The Plexus-ITG merger poses a challenge for other firms but opportunities exist for those that prove they can add value.

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