Transaction cost analysis (TCA)

Transaction cost analysis measures how much it actually cost to execute a trade, beyond the visible commission, by comparing the price achieved against one or more benchmark prices. It is the standard way trading desks and asset managers evaluate execution quality after the fact.

Common benchmarks include the price at the moment the order was placed, or arrival price, the volume-weighted average price over the execution window, and the price at the previous close. The difference between the achieved execution price and the benchmark is decomposed into components such as the bid-ask spread crossed and market impact from the order's own size moving the order book, distinct from simple commission, which is a fixed, visible fee.

TCA is used to evaluate brokers, execution algorithms, and trading desks, and to refine how algorithmic trading strategies are configured for future orders. It is also applied inside backtesting to make historical simulations more realistic, since ignoring these costs is one of the most common reasons a backtested strategy looks far more profitable than a live one. A common pitfall is choosing a benchmark that flatters results, such as one influenced by the very order being measured.