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Foreign Exchange

FX transaction cost analysis takes centre stage

Providers of FX transaction cost analysis (TCA) are proof ‘it’s an ill wind that blows nobody any good’, as they aggressively promote their services to institutional clients after fixing scandals.

Insufficient analysis of FX transaction costs has obvious implications for pension funds, hedge funds and asset managers in terms of diminished capital, lower investment performance and higher financing costs

The old adage that ‘what isn’t measured cannot be managed’ comes to mind.

TCA is not a new concept, but appreciation of its value in the FX space has risen appreciably since the full extent of market manipulation became clear. 

Jim Cochrane-160x186

Jim Cochrane, ITG

Cost reduction is another motivation – with service providers claiming to achieve considerable reductions in FX transaction costs – while asset managers are facing increasing regulatory pressure to provide best execution.

John Halligan, president of Global Trading Analytics, says successful analysis largely depends on the ability of the provider to master the subtleties within the process, while Aite Group senior analyst Howard Tai describes the key element of an effective corporate FX TCA service as a reliable set of market data, preferably based on trades versus indicative quotes.

Services are provided by single- and multi-dealer platforms. 

“Multi-dealer platforms would be preferred as they allow price comparison between different liquidity providers,” says Tai. “Transactional data should be reliable on either type of venue as they both provide executable prices.”

When asked to assess the accuracy of the data used by single- and multi-dealer platforms, Andrew Woolmer, managing director New Change FX, observes that no bank or broker should be using their own trading data.

“Using the same liquidity for execution and TCA is circular, and the analysis isn't worth the paper it is written on,” claims Woolmer. “You cannot assess the cost of liquidity provision provided by a bank by measuring trades done with that bank against the bank’s own price.  “It is impossible for data used to trade on – that can be manipulated by anyone by simply moving a bid or offer – ever to be seen as accurate.”

When dealing with illiquid FX pairs, the importance of having access to more data sources increases significantly

Amarjit Sahota, Klarity FX

Given the size and liquidity of the FX markets, the data used even by single-dealer platforms is typically good for main FX crosses and satisfactory for the purposes of completing initial analysis, adds Amarjit Sahota, director Klarity FX.

“Ideally, you want access to more data sources either through aggregation for data sources or a data feed from a multi-dealer platform,” says Sahota. “When dealing with illiquid FX pairs, the importance of having access to more data sources increases significantly. 

“But in our experience, people really get hung up on this issue without first realizing if they require broad level or precision analysis – if you are poorly executed by 10 basis points or more, you don't need to be overly concerned by the source discrepancy of 0.1bp.”

Sahota suggests TCA must take into consideration behavioural studies over longer time-frames, such as session performance. 


Michael Richter, director of TCA at Markit, agrees that the quality of data varies by currency pair and deal size, which is tied to the increased electronification of FX trading.

“Smaller deal sizes – especially in more liquid currency pairs – are increasingly executed on electronic trading platforms,” explains Richter. 

“Even though there is no central limit order book, the quotes are fairly representative because as soon as a trade is executed on one trading platform, market makers will send out a new set of quotes across all platforms. Less liquid pairs and larger deals still have the same issues of data scarcity and staleness that have traditionally been problems for voice-driven OTC markets.”

Evaluation metrics have also changed significantly during the past few years, observes Jim Cochrane, director of FX TCA at ITG.

Further reading


Technology and innovation:
special focus

“Initially, clients were only shown their executions against the high, low or estimate of the daily average rate, which would be considered compliance monitoring with a small element of process improvement,” says Cochrane. 

“Now trades can be evaluated with millisecond precision against a variety of single-point-in-time and interval benchmarks. They can be evaluated on a micro-level (algo performance) and a macro level (quarterly reporting and trend analysis) and clients can receive pre-trade analysis, instantaneous analysis via a trading platform, daily reports, etc.”

While all TCA providers offer post-trade analysis, some are now rolling out pre-trade and real-time analysis, which are more suitable for buy-side institutions and hedge funds/commodity trading advisors, adds Tai.

As FX trading becomes increasingly electronic, the need for additional TCA metrics and the point at which these metrics have to be evaluated has changed, concludes TradingScreen senior analyst Dana Caggiano. 

“While trading, in-trade TCA analytics and tools are needed to help assess execution performance in real time, while post-trade analysis meets compliance requirements and gives a lifecycle view of execution and implementation quality,” says Caggiano.

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