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In FX, clients are looking more like regulators

The absence of a regulatory imperative has not deterred FX traders from increasing their use of transaction cost analysis tools, in turn increasing the pressure on brokers at a time when margins are already thin.

Broker analytics are all the rage in FX. According to a recent report by Greenwich Associates (The State of Transaction Cost Analysis – 2019), about 60% of FX trading desks have now deployed trade performance analysis tools.

On the surface this is unsurprising. Buyside firms want to make sure they are getting the best prices and service from their liquidity providers (LPs) and are therefore using more transaction cost analysis (TCA) tools to develop a clearer picture of how all their LPs are performing. 

But it has happened without a “regulatory tailwind”, notes Richard Johnson, the report’s author, since spot FX is not explicitly covered by the best execution requirements of Mifid II, the European Union’s Markets in Financial Instruments Directive.

Tom Higgins,

And it’s getting easier for the buyside to assess broker quality. Sophisticated monitoring tools allow end-to-end transaction tracking to be performed in real time and provide a correlation between trade performance and financial outcome.

“With these tools, buyside clients can monitor trade performance and P&L for every transaction, making it far simpler to gain an accurate performance and profitability comparison between the FX brokers with whom they deal,” says Paul Spencer, chief operating officer at Velocimetrics, a trade and payments analytics firm. 

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