On this week’s podcast Colin Lambert is joined by Xav Porterfield, head of research at New Change FX (NCFX), to discuss a new method of measuring execution quality – the unit cost of volatility (UCV). Porterfield explains how the measurement actually derives from a landmark market impact paper in the mid-1990s before the two delve into the theory behind it and how NCFX plans to use it.
The discussion then turns to more practical matters with Lambert asking how a trader on an execution desk could utilise the analysis and also about a case study that used UCV as a methodology to analyse execution at the 4pm Fix. Whilst accepting that the random walk nature of FX markets does mean that wins and losses from executing at the Fix are imbalanced, but not hugely so, Porterfield highlights the disproportionate returns highlighted by the research, leading Lambert to observe that not even he could find value in the risk/reward ratio when it is negatively skewed 15-1!
There is time for Lambert to highlight early reaction to LMAX Group’s launch of Weekend FX – which does exactly what it says on the tin – as well as ponder a new debating arena for the FX industry; the decreasing value of the primary venues.