Foreign exchange: Future of cost analysis is 24/7
Daily cost analysis coming; Protects against client litigation
Transaction cost analysis (TCA) in the FX market will become a daily activity for the currency traders of institutional investors and asset managers, and their custodian bank partners, says Jim Cochrane, analytics director at agency broker and financial technology firm ITG.
The majority of FX market clients for TCA firms carry out analysis of the efficiency of the life of their currencies trades only on a monthly or quarterly basis. "The future is daily TCA, where if you feed ITG or someone like us your data overnight, we can process it and you can look at it the next day," says Cochrane.
The need for daily TCA was made all the more pertinent after a recent spate of lawsuits in the US against custodian banks for alleged fraud in the handling of FX trades. Those lawsuits shone a light on bad bank practices and, as a result, asset managers, corporates, institutional investors and other firms that rely on custodian banks to execute their FX deals are looking to increase their TCA capabilities.
A recent survey by Greenwich Associates found that TCA for FX trades increased 33% this year from 28% in 2011, with 41% of institutions with more than $20 billion in assets using the analysis.
The daily analysis of the life of an FX trade from initiation of the transaction through to completion, and all of the steps in between, is the inevitable outcome of a client base of fiduciaries and other types of fund managers that are less trusting of their custodian bank partners, says Cochrane.
However, first of all TCA firms, their clients and currency-trading platforms must develop specific computerized algorithms to allow for daily transaction analysis.
"It surprises me that the FX market isn’t already using algorithms to analyse trades like the equities market does," says Cochrane. "In some cases, algorithms have been written [for FX TCA] and a lot of banks do have some algorithms, but it’s still in its infancy. That’s where we want to go for TCA analysis and for the customer to get the best possible rate."
To quickly bridge the technology gap, institutional investor and asset management currency traders can facilitate the uptake of algorithms for pre-trade TCA in the FX market by "getting off the phone" and learning to rely more on trading signals developed by computers, says Cochrane.