Transaction Cost Analysis

Transaction cost analysis (TCA) is the study of trade prices to determine whether the trades were arranged at a favourable price - low prices for purchases and high prices for sales.

Transaction cost analysis can be divided into Pre-trade analysis and Post-trade analysis.

Pre-trade analysis - Pre-trade analysis involves taking known parameters and determining an execution strategy that will minimize the transaction cost to a given level of acceptable risk.

Post-trade analysis - Post-trade analysis is the process of comparing actual execution price to the several benchmarks such as VWAP, TWAP, and Implementation shortfall to evaluate the performance and to determine the future transactions.

Transaction cost analysis helps the investors to understand how well their decisions have been acted on and how they can improve their overall performance. On the other hand, as different trading strategies correspond to different risk-cost tradeoffs, investors need to know the real cost of implementing a given trading strategy. As bad execution can negatively impact the total performance of a prudent investment decision.