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Foreign Exchange

Trading and execution: Execution for lost alpha

Even though spreads for most foreign exchange products are often so thin that they barely exist, the use of transaction cost analysis (TCA) to measure execution is on the increase.

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.

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