Thomson Reuters is working with FX analytics specialist BestX to enable buy-side participants using Thomson Reuters FXall and FX Trading to streamline analysis of transaction costs, helping them define, achieve and demonstrate best execution.
BestX is designed to be highly customizable so that trades can be analysed according to any criteria desired, from asset class to liquidity venue. It believes it has the most sophisticated technology offering in the market, allowing reports to be produced in real time, analysing any factor of a fund's trading, from currency pair to trading venue to counterpart.
|Oliver Jerome, BestX|
Clients can buy the system through Thomson Reuters and have the system fully integrated into the Thomson Reuters trading platform. More analytically sophisticated fund managers can also acquire the system directly from BestX.
“The FX market is more heterogeneous than the equities market; there are more different types of institutions trading for many different reasons,” says Pete Eggleston, co-founder and director at BestX. “A quant hedge fund trading FX is going to have very different requirements for a benchmark to a corporate hedging its currency exposures.”
Thomson Reuters considered building a TCA platform itself, but said its clients were looking for a provider that was independent of any specific trading venue. This enables a fund manager to send all its trades through the system without disclosing to Thomson Reuters where else it is trading.
BestX says that a law firm has conducted a comprehensive MiFID II end-to-end review of its product and its efficacy from a best execution and compliance perspective has been verified.
BestX stresses its independence from specific trading venues, including Thomson Reuters. But some in the market have questioned the independence of an arrangement that uses Thomson Reuters data to analyse trading conducted on a Thomson Reuters platform. Although the analysis itself is being done by a third party, that party is arguably not fully independent, given that Thomson Reuters has invested in BestX.
The doubt about independence is important. In a delegated regulation for packaged retail and insurance-based investment products (PRIIPs), the European Commission stated in June that when calculating transaction costs the arrival price “must not simply be the price available from a single counterparty or foreign exchange platform, even if an agreement exists to undertake all foreign exchange transactions with a single counterparty”.
BestX insists that it takes data from multiple sources, not only Thomson Reuters, which will be used to analyse all trades. “We have historically consumed other sources of data, and will continue to do so where we feel this helps provide our customers with a more accurate picture of the market for TCA purposes,” says Oliver Jerome, co-founder and director of BestX. “The more data, the more accurate the picture. Indeed, to deliver accurate TCA the data should come from multiple sources.”
Thomson Reuters suggests that BestX is the only technology provider offering TCA specifically for the FX market. FastMatch, a fintech firm focusing on the FX market, challenged this assertion by making its proprietary algorithmic and TCA services available to subscribers only days after Thomson Reuters made its announcement.
But FastMatch enables managers to analyse trading done on its Electronic Communication Network (ECN) specifically, giving clients that use FastMatch algorithms an automated TCA report when their orders complete, showing the algorithmic execution performance versus arrival price, FastMatch midpoint and other benchmarks.
Having an FX specialist analyse FX trading costs makes sense because the information available in currency markets is very different to what is available in equities, with no central tape or central bid-offer, for example. In addition, a lot of currency trading involves forwards, which is a more structurally complicated business than equities.
However, such issues blur the lines distinguishing TCA from execution analysis, which takes other factors than simple cost into account and can be a useful way for managers to analyse their trades for patterns that might improve their future efficiency.
Cost vs compliance
The proposed approach of the UK’s Financial Conduct Authority (FCA) to TCA, outlined in its recent consultation document looking at how the business should be applied in the pensions industry, is relatively simple. It suggests the disclosure of transaction costs “based on a comparison of actual prices with the value of the asset immediately before the order to transact entered the market”.
One market observer explains that the regulator wants to see a mid-rate price for the millisecond before the order was sent, not adjusted for the size of the trade or any other factors. “The ticket will have the fill and the order time; that is all you need to conduct TCA,” says the source. “It has nothing to do with the size of the trade or the liquidity conditions.”
What Thomson Reuters and BestX are offering is in fact a more sophisticated set of analytics to help managers better understand the factors they can control. The FCA notes that, from a regulatory perspective, “it is not necessary to break down implicit transaction costs into other elements”, as BestX allows managers to do. It also makes no distinction between costs that are within or beyond the manager's control.
The FCA notes that “asset managers who want to increase the efficiency of transactions may prefer to analyse the various components that make up the transaction cost, but it is not necessary to do so to come up with a cost that could be disclosed”.
The principal driver for using BestX analytics may not therefore be compliance, but cost management. Traders can refine their trading activity to maximize profits and minimize costs, focusing on the small number of trades that are most important in terms of generating overall performance.
Neill Penney, co-head of trading at Thomson Reuters, says: “Given how difficult it is currently for fund managers to deliver positive returns, the drag of trading costs is a particular problem.”