FX: Start-up BestX wins first bank client with JPMorgan
JPMorgan’s decision to adopt a newly launched trade analytics service for its market-leading currencies business highlights the need for independent validation of execution quality in foreign exchange, according to the service’s co-founders.
The bank’s clients will be able to access the analytics at no extra charge to check they achieved the best possible trade execution.
“This is a significant validation of our product,” says Oliver Jerome, co-founder and director of BestX. “The banks will never stop developing their own pre- and post-trade analytics, but there is growing demand for independent TCA, so we expect more banks will look to offer it in the future.”
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Both Jerome and co-founder Pete Eggleston had worked previously in senior FX roles at Morgan Stanley, leaving the bank in December 2015 to launch BestX. The company’s post-trade software measures all aspects of trade execution performance on FX transactions, including spread and impact costs, and signalling risk.
Like many other banks, JPMorgan has developed its own in-house analytics to support its electronic FX franchise and help clients achieve best execution in line with evolving regulatory requirements, but there is growing recognition of the value provided by independent analysis.
“Our own pre- and post-trade tools that assess the total cost of analysis of our FX trades have proven popular with clients, but we know that they also want to hear it from an independent third party, and this should boost their confidence in our quality of execution,” says Richard James, co-head of markets execution for macro products at JPMorgan.
JPMorgan will initially use what is known as point-of-trade analytics, whereby if clients request it, details of their electronic and algorithmic FX trades will be passed instantly to BestX, which will perform detailed analysis against various benchmarks and then generate a PDF report that will be sent directly to the client.
BestX expects that, in time, JPMorgan and other banks might choose to access more sophisticated analytics and stream them as part of their own electronic offering, but the point-of-trade option is the natural first step in that journey.
Having started its business with post-trade analytics, BestX is now developing a pre-trade service that would allow clients to assess trades before executing. This is expected to be launched within months.
“We will launch pre-trade analytics in the same way as we launched post-trade last year, starting with a product that we feel is intellectually rigorous and then gathering feedback to improve it quickly,” says Jerome. “Having a cloud-based service and being a nimble company allows us to upgrade the product very quickly.”
While still only a small start-up, BestX has experienced rapid growth. Before JPMorgan, a number of buy-side firms had already adopted the technology, and the company has a prospective client list of buy-side and sell-side firms in testing and contract negotiation.
In December, BestX unveiled its first major partnership, announcing that Thomson Reuters had taken a minority equity stake and would make BestX analytics available to buy-side clients using the firm’s FX trading platforms.
'Statement of confidence'
However, the JPMorgan deal is significant in that it shows sell-side support for independent TCA.
“This is a major statement of confidence by JPMorgan in the efficacy of its own product, being the first major FX provider to invite independent validation of the quality of the execution it can achieve through its proprietary algos,” says Eggleston.
Offering access to independent TCA is something of a leap of faith for any dealer, as the analysis could reasonably show that using an alternative bank for FX dealing might yield better results, but JPMorgan is confident BestX will cast it in a favourable light.
“When algo performance, quality of execution and the cost of trading are taken into account, we are confident that we are among the best in FX execution and this helps us to prove it to our clients,” says James.
A number of evolving international initiatives, including the European Union’s recast Markets in Financial Instruments Directive and the Bank for International Settlements-sponsored FX code of conduct are driving an industry-wide focus on best execution and robust TCA.
“The move towards transparency is well under way and will continue to gather momentum, driven by regulation and changes in market structure and behaviour,” says Jerome. “Clients need strong, independent validation of their trade execution, and we see growing interest in our product.”