FX: The rise of quality execution analysis


Paul Golden
Published on:

A combination of regulatory requirements and commercial imperatives are driving interest in quality execution analysis (QEA), a subset of transaction cost analysis (TCA) that is a vital component in measuring FX best execution.


The rise in electronic FX trading activity and adoption of pre-trade and real-time analytics tools has placed increasing importance on QEA, suggests a recent report by Forex Datasource.

QEA is defined as the process of analysing pre-trade liquidity, at-trade market impact and on-the-fly strategy-change implications of FX orders executed via exchange-like market environments.

Many observers refer to Mifid II’s best-execution mandate as the main factor behind increased use of QEA, although third-party consultants and TCA providers are also stimulating demand by pushing products that help financial institutions analyse their executions and trading alternatives, according to Curex CEO James Singleton.

“Financial institutions recognise the benefits that come with the pre- and post-trade analytical loop, albeit at different speeds based on their size, sophistication and legacy practices,” he says.

Commerical decision

Guy Hopkins, founder of FairXchange, says using QEA is as much a commercial decision given the range of options available to trade FX, observing that there is a high degree of scrutiny into execution quality by asset owners to the extent that it is a notable factor in the allocation of mandates.


Vinay Trivedi,

Vinay Trivedi, senior vice-president, FX strategic initiatives at FlexTrade, agrees that there is a strong drive to analyse the performance of execution traders from an internal benchmarking perspective.

“While we see institutional investors carrying out such analysis of their custodians’ execution process, many have also started analysing their asset manager and trader performance,” he says, “To take the matter in hand, many funds now have a dedicated execution desk for FX overlay hedging and trading.”

Traders are also now being evaluated – and in some cases even compensated – based on their trading performance.

“Quality execution analysis is an accurate and transparent way to evaluate trader performance,” says Global Trading Analytics president John Halligan. “In addition, execution analysis measures broker performance and helps traders route trades effectively.”

Availability of information is yet another contributory factor, suggests Andrew Woolmer, CEO of New Change FX (NCFX).

“The growth in the use of electronic execution in FX amongst buy-side firms means that these clients are now able to understand spread, skew, fill ratios, response times and factors such as implementation shortfall, normalized temporary and permanent market impact and decay in real time.”

Bigger picture


Ruben Costa-
Santos, ITG

When asked how this type of analysis fits into a best-execution strategy, Ruben Costa-Santos, head of multi-asset class analytics at ITG, says it is important to note that best execution applies to the whole investment process, not just the FX execution aspect.

“For instance, when the FX order originates from a cross-border securities trade, best execution needs to be considered in the context of the security execution and account for factors such as timing, internal netting opportunists and market risk,” he says.

Investors can fine-tune their list of available liquidity providers (LPs) based on the output of the execution quality report, explains Jean-Philippe Malé, CEO of BidFX.

“Most investors will look to estimate slippage at point of trade versus a neutral mid-point feed, while others will look at yield decay on individual clips with a given provider,” he says.

“Some higher-level benchmarks, such as high/low of the day, were historically used by passive investors. The challenge for non-spot traders is to find a good source of data for the forward points.”

Granular view

One of the issues raised in the Forex Datasource report was the extent to which algo-trade performance improves with a more granular view of average trade size.


Jill Sigelbaum,

“Granular trade data allow for a good understanding of the specific factors affecting execution,” says Jill Sigelbaum, head of FXall. “When making conclusions to improve trade performance, it is useful for outlier filtering as well as accurate classification of the trades.”

By using millisecond data to analyse trades, it becomes straightforward to assess the performance of an LP, particularly within the last-look window, adds NCFX’s Woolmer.

“This helps clients understand what the LP is doing with the transaction and select LPs on a far more informed basis,” he says.

Using the right data set and ensuring data consistency across venues and brokers is vital to the effective use of QEA, says FlexTrade’s Trivedi, as is including some means of using the customers’ objectives to make sense of the huge volume of data available.

“This requires services such as an alerts capability to highlight particular issues that are relevant to that user,” he says.

“There must also be a feedback loop so that conclusions derived from TCA are fed back into the trading process – for example, making sure that the post-trade analysis can be used to inform pre-trade decision-making.”