Based on correlation models, predictions provide the benefit of following a scaling that is sensitive to order size and market conditions. Estimates can provide traders and portfolio managers with a frame of reference for likely execution cost, allowing expectations to be set up-front and in post-trade to adjust absolute arrival price. This allows users to distil a relatively positive outcome even when the absolute measure shows slippage.
Capturing the spread to the default benchmark at order arrival shows the absolute arrival price for the target bond, and also provides a measure of its value to what is effectively an index of one security at that time. Taking the spread measurement at the time of execution shows how the spread changed in the intervening period. If the order is to buy in a rising market, absolute measures will deliver a negative result but if the target bond tracked or potentially lagged the benchmark, it’s possible to show the spread target was beaten or exceeded despite this absolute result.
Peer benchmarks are also a key tool for FI TCA relative measurement. Calculated using anonymized and aggregated post-trade results of a community, they allow traders to compare the absolute results for their orders with the average performance of peer orders using similar grouping characteristics. This is therefore a comparison of order peers, competing for the same liquidity, rather than an arbitrary comparison of similar firms, and provides another relative measurement. Whilst enforcing minimum contribution thresholds can provide some measure of quality, the next step would be to introduce quantitative measurement of sample density to provide transparency on the quality of the number. Beyond that, studying the distribution tails can also inform traders where to set thresholds for outliers that can show orders executing in the top or bottom segment of all trading.