The structure of the FX market means that transaction cost analysis (TCA) within this asset class is unlikely to look like it does equities for the foreseeable future, according Dan Torrey, global head of FX e-commerce sales at Northern Trust.
TCA is clearly much easier to perform in the equities market because it has a consolidated tape, which provides one uniform data set from which firms can analyse the cost and effectiveness of their execution. This, says Torrey, turned equities TCA into “more of a science that’s very hard to dispute”.
By contrast, he points out that, not only is FX an OTC market without a central tape, but that the reference points for pricing has become more diverse over the past decade.
Torrey says that ten years ago EBS and Reuters still formed the central price reference points in the interbank space, so that everyone knew to look at the former for euro pricing and the latter for cable pricing. However, he claims “that no longer is the case today” and that firms need to instead consider a wider variety of data sources.
“Say I’m a large asset manager I’m trying to build my own TCA model, which involves gathering the data cleaning it, trying to normalise it and then analysing going forward in terms of what did I learn and how is this going to inform my execution decision in terms of routing and which LPs I hit going forward.
“Its very difficult to do this because even if they shop around with several third party TCA providers they’re going to find that these shops – who are very good at this and improving – they’re perhaps using different benchmarking, they almost certainly use a different universe of LPs and data sets coming in and then the way they handle the reporting, how do you come up with your median bid and ask, how are you measuring hit rates.
“We can go on and on, but the fact is that they’re not going to have the same methodology and have the same exact uniform template. I don’t believe that the industry will be able to quickly resemble equities, and I’m not saying it has to, but it has to continuing trying to follow the scientific lead that equities has laid out,” says Torrey.
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