And according to a report published in March by Tabb Group (Imperfect knowledge: international perspectives of transaction cost analysis), a big reason why the buy side is so interested in TCA is because buyers identify trading costs as their "most prevalent source of lost alpha".
The report’s author, Adam Sussman, points out that while equity traders have used TCA for years, the structure of the FX market has not made this easy for currency traders. That is now changing and, perhaps counter-intuitively, it is the big sell-side institutions that are facilitating the existence of more robust TCA for FX. "Brokers are playing a critical role in this development," says Sussman. "Bulge-bracket brokers have been busy in the last two years developing options and FX algorithms. TCA for these products will follow as a way to demonstrate execution."
Mark Warms, general manager, Europe, at multi-bank platform FXall, says that the sell side has long harboured a desire to measure its total execution costs in finer detail.
"We’ve always had clients looking at TCA, especially in the asset manager community where they are really keen to prove they have got best execution," he says. "In equities, there are easier ways to do it and there are plenty of third-party vendors who are connected up to every trading venue. The problem in FX is that so much business is done OTC. People have to be more creative about sourcing the data."
Sussman agrees that TCA has been harder to implement in FX than in equities. "Because there is no central printing facility to report transactions, and hundreds of different banks quoting the product, collecting the requisite data is cumbersome to say the least," he says.
But Sussman argues that despite these difficulties, buy-side FX traders see the benefit in benchmarking their execution. About 58% of them are now using TCA and this number will grow. "FX traders are literally begging for consolidated market data for volume, best bids and offer and beyond. However, this is a problem for any market structure that does not encourage the public display of customer orders or rules around printing executions," he says.
According to Warms, the implementation in the European Union of the Markets in Financial Instruments Directive has helped define a framework for TCA. "Most clients seem to want to do it [prove best execution] the ‘Mifid way’. Sell-side firms have defined their Mifid policy and then they look to prove that they have delivered best execution within those parameters," he says.
Warms says that as a result more and more TCA vendors are looking to connect up to multiple trading venues to enable them to deliver robust analysis to their clients. Perhaps most important, though, is the fact that the sell side appears to recognize that it will have to deliver execution accountability to capture and retain client business.
"What’s interesting is that some banks are now looking at ways they can perform TCA for their clients," he says. "They know that often, especially when they are dealing in large amounts, they can actually provide a better price in a full amount than a client could get through an aggregator or on a single platform. They can prove that with TCA, so they are not opposed to it, as some people might think."