A shadow falls across the Bank of England
During a presentation on FX market fragmentation at TradeTech FX 2019 in September, Andrew Hauser, executive director for markets at the Bank of England (BoE), spoke of the merits of responding to the challenge of greater fragmentation by seeking more effective, robust and independent aggregation, analytical and execution tools.
One of the observations he made was that TCA data sourced exclusively from one liquidity provider are unlikely to provide an objective evaluation.
However, within weeks of Hauser’s presentation, Greenwich Associates published research that found that 53% of FX traders surveyed said they did not use TCA at all. Of those who did, 22% used venue-provided TCA reports and 15% relied on reports provided by dealers.
Greenwich considers such reports as potentially valuable, but often self-referential, since while they give the user a sense of their execution quality relative to what was available at the time on the platform or from the dealer, they do not take into account the wider market context.
Just 43% of the dealers who used TCA worked with third-party providers, Greenwich found.
Independent TCA vendors acknowledge the difficulty of obtaining pricing data from venues, but they also observe that measuring the quality of execution from prices generated by the venue or the counterparty will only prove the trading decision and cannot identify the costs of trading elsewhere.
“The only way to ensure transparency and impartiality is to compare execution to a venue neutral and counterparty neutral aggregated mid-rate,” says New Change FX head of research Xavier Porterfield.
According to Pete Eggleston, co-founder of BestX, it is not just a question of impartiality, but more the need to be able to measure execution performance on a totally consistent basis.
“The market suffers from a lack of consistency and standards when it comes to performance measurement, such as which market reference data to use, which benchmarks to use and how to calculate them,” he says.
“It is rare that an FX trader will only ever execute with one dealer or on one venue, so as soon as they trade across multiple dealers there is a need to be able to measure performance on a level playing field.”
If the results are clear and adequately communicated to those within the trading process, trading results should improve over time. If nothing is communicated, nothing changes- John Halligan, Global Trading Analytics
The good news for these providers is that clients are now asking for user tools within a data science infrastructure to enable analysis in a more robust and dynamic way, suggests Integral chief revenue officer Vikas Srivastava.
“This helps to generate targeted insight in a way that a generic mid-rate or canned TCA reports couldn’t necessarily provide,” he says.
While it is clearly not ideal that FX traders are relying on venues and dealers to measure execution, at least it means they are measuring it, which is the essential first step to better execution.
That is the view of Guy Hopkins, founder of FairXchange, who says customer objectives are also relevant.
“Dealers have invested heavily in pre-trade analytical tools as they are keen for their single-dealer platforms to maintain their position as a client’s ‘window on the market’,” he explains.
“If they are helping their clients gain insight and use their execution tools more effectively, that strikes me as a good thing. After all, they know their tools better than anyone else.”
However, Hopkins also recognises the value of working with third parties unencumbered by relationships with venues or dealers, and recommends that to avoid any potential conflicts of interest clients should pay for that analysis themselves rather than have their dealers subsidize the cost.
In his TradeTech FX 2019 presentation, the BoE’s Hauser also warned that it was far from certain whether independent third-party TCA providers could develop business models in FX that were economically sustainable and robust enough in terms of their quality and breadth of data inputs to drive widespread adoption.
“That is a valid concern, but we see the issue differently,” says Curex Group chairman and CEO James Singleton. “The onus is not on third-party TCA providers to build sustainable business models to drive widespread adoption. The buy-side community needs to embrace robust TCA and help the providers of the service build more effective tools.
“The business model will succeed if the cost of trade analytics is independent of execution cost and the product is used to improve the trading outcomes of the customer.”
Klarity FX director Amarjit Sahota accepts that there is probably room for consolidation within third-party TCA providers and that the easy option for some has been to integrate into dealer/exchange platforms – although this limits market reach and independence.
Employing advanced analytics technology – such as artificial intelligence and machine learning – to create more robust data and views in the market will enhance opportunities for the best providers, says Aite Group senior analyst Audrey Blater.
“We may see some players moving in and out of the space as venues, dealers and third-party TCA solution providers put pressure on incumbents,” she adds.
According to John Halligan, president of Global Trading Analytics, the key to success lies in communication.
“If the results are clear and adequately communicated to those within the trading process, trading results should improve over time,” he says. “If nothing is communicated, nothing changes.”