Using Bloomberg analytics to make better pre-trade decisions

Pre-trade transaction cost analysis (TCA) is still new to the fixed-income space but is growing in popularity.

Bloomberg has responded to demand for complementary high-level analytics by building a suite of best-execution tools that enable traders to estimate the performance of their orders before executing a trade.

The new functionality was the subject of a recent Bloomberg webinar – here are the key takeaways from that presentation:

What’s the benefit of pre-trade TCA?
TCA provides insights into the fixed-income market so that traders can make more informed trading decisions. These include estimates of how much they will pay in execution costs, the volumes they can buy or sell and the probability of executing the order in a day.

Leveraging large pools of post-trade data going back five years, pre-trade TCA can offer insights into many factors that can help determine a future trade’s performance. The model can help portfolio managers in portfolio construction and bond selection as well as buy-side traders and dealers in managing expectation and price negotiations.

What’s the benefit of pre-trade TCA?
TCA provides insights into the fixed-income market so that traders can make more informed trading decisions. These include estimates of how much they

will pay in execution costs, the volumes they can buy or sell and the probability of executing the order in a day.

Leveraging large pools of post-trade data going back five years, pre-trade TCA can offer insights into many factors that can help determine a future trade’s performance. The model can help portfolio managers in portfolio construction and bond selection as well as buy-side traders and dealers in managing expectation and price negotiations.

How traders can use TCA <GO>

The new functionality suite can be accessed via TCA <GO> through the Bloomberg Terminal. It gives traders mechanisms to assess the complexity of their trades, and is based on analysis of the results of millions of historical trades. Running the numbers through Bloomberg’s TCA engine will provide a good pre-trade performance estimate that clients can measure against an industry average.

The ability to see how this comes together is important. So, for any given asset, a sleek, easy-to-read four-part dashboard starts with a customizable liquidity tree where clients can determine the parameters against which they want to test their trade. This element will also display the daily executable volume of the selected bond at a probability of 50 percent and 20 percent.

A separate panel presents all the vital information about the bond, while another graphically visualizes the CBBT price and indicates where the order is likely to sit on the spread.

How can the tool be customized?
The TCA engine permits clients to test their selected bond under buy or sell arrangements. This is important because bond markets are asymmetric in their costs, especially for large sizes.

Order size can affect the price and execution probability of the trade, and for this reason orders can be tested against cascading levels of transacted volumes.

Clients can also estimate the performance of a bond under different rating and spread scenarios, providing insights for assets whose risk levels are likely to be reassessed.

Similarly, trade results can differ according to the currency in which they are transacted. TCA <GO> has been calibrated differently for Sovereign bonds vs Corporate bonds. Sovereign bonds are supported globally and Corporate bonds have been calibrated for USD, EUR and GBP. Results can alternatively be expressed in price and spread.

What goes into the model?

TCA <GO> uses historic and real-time data that Bloomberg has culled from millions of trades over the past five years. Arrival price is calculated as a mid-point of real-time CBBT bid-ask spread.

A number of factors determine trade cost, expected volume, and probability of execution, including:

Order size
Side
Bid-Ask Spread
Outstanding Amount
Rating
Currency
Age, term and time to maturity.

Gaining an edge at the start
Traders are retooling to meet the challenges of a fast-changing financial landscape and they’re looking to get an edge through technology. Bloomberg has created a new tool that enable the buy-side to do just that at the very beginning of the trade lifecycle. Trade cost model is also being integrated into Bloomberg’s post-trade offering BTCA. It allows traders to assess their performance and dealer results for each trade and en masse across various bond sub-group and time frame. The TCA engine for fixed-income is backed by Bloomberg’s best-in-class data, analytics and pricing sources to ensure traders get the best possible performance from their portfolios.

For more information on Bloomberg's functionality to access historical emissions estimates, request a demo of our solutions today.