Articles tagged by Best Execution
The European Securities and Markets Authority (ESMA) has published a Q&A document seeking to clarify expected standards around certain practices, including best execution.
The questions have been set following feedback and enquiries from the general public, other regulators and market participants.
On best execution ESMA publishes two Q&As, the first explains the different between the “reasonable steps” firms were expected to take to obtain the best possible execution under MiFID I and the “sufficient steps” they are required to take under MiFID II.
Petra Wikstrom, global head of Execution and Alpha solutions at BNP Paribas, talks to Profit & Loss about why FX TCA benefits from “a pragmatic engineering approach”.
Profit & Loss: When it comes to producing meaningful TCA, what are the big data challenges facing market participants?
Petra Wikstrom: Over the last five years we’ve seen a constant uptick in the electronification of FX, but the number of venues offering FX liquidity has increased far beyond that, which means that similar volumes are now offered across more venues.
BestX, formed earlier this year, has released its first TCA product. Colin Lambert takes a look.
If there has been a positive outcome from the trials and tribulations of the FX market in recent years it has been more focus on not only achieving best execution, but also about what that phrase actually means. This has resulted in more products and services aimed at helping clients make informed decisions around how they interact with the FX market – no longer is it just a sideshow that can be handled without due care and attention – as well as the gradual move into the market of new firms.
Thomson Reuters has partnered with BestX to enable buy-side participants using its FXall and FX Trading platforms to streamline analysis of transaction costs, helping them define, achieve and demonstrate best execution.
Through the partnership Thomson Reuters will offer connectivity to the independent transaction cost analysis (TCA) service from BestX from its FXall and FX Trading desktops.
Thomson Reuters customers will be able to have their trades sent automatically to BestX for independent post-trade transaction cost analysis, and also have a single sign-on desktop integration.
Profit & Loss understands that BestX, the start-up technology company that provides independent trading analytics, has signed JP Morgan as its first major FX sell-side client.
The deal marks a significant step forward in the industry as it represents the first time a major dealing bank has integrated a truly third party’s service to offer post-trade verification of execution quality. It will allow the bank’s own clients to independently define, achieve and demonstrate best execution through a post-trade transaction cost analysis (TCA) when trading electronically with the bank.
In the interests of total transparency we also, as usual, cast our eye over last year’s predictions to see how they went. As always, these predictions will be viewed through rose-coloured spectacles to ensure we look as good as possible!
We kicked off last year’s predictions by suggesting the entire FX world would take a more realistic view of developments – that liquidity and spreads would reflect this thought process, and that market share would be a declining influence in business decisions.
XTX Markets has made XTX-ray, a tool designed to replicate how sell-side market makers analyse spot FX liquidity, available to buy side market participants.
XTX-ray looks at a wide range of data, including fill ratios, the cost of rejected trades in USD, spreads and market impact, to reveal “hidden” costs embedded in firms’ spot FX execution with the aim of enabling them to more effectively analyse the liquidity they are accessing.
“XTX-ray makes state-of-the-art sell side execution analysis available to buy side firms, and counterparties will be able to evaluate the execution quality of their liquidity providers.
GTX has partnered with Ideal Prediction, an independent trading analytics and data science company, to offer its clients analytics aimed at to optimising their FX trading.
The market data, tools, and services are designed to enable buy-side and sell-side market participants to optimise profitability and simulate strategies, as well as perform Transaction Cost Analysis (TCA).
GTX says in a release announcing the partnership that it will further enable sell-side market participants to benchmark execution performance, analyse client flows, and optimise risk management strategies.
As part of the public service duty of this column (and especially as a warning to any stag parties thinking of going there dressed as Robin Hood and his Merry Men), I feel the need to point out that a law exists in York, England, that says it is legal to murder a Scotsman within the ancient city walls, but only if said Scot is carrying a bow and arrow.
Clearly this is a law that has no basis in reality and is backward looking – however it is only slightly worse than MiFID2 when viewed through the prism of the FX market.
Increased attention on market impact has prompted non-bank market making firm XTX to release a new analysis tool, XTX-ray. Colin Lambert takes a look.
Market impact has grown steadily as a topic of conversation in the FX industry, thanks in part to the events of October 7, 2016 in Cable, but also due to the increasing instances of “mini” flash moves in markets. As risk warehousing activities have been scaled back across the banking industry, a crucial buffer is being thinned out, meaning orders that previously had minimal or no impact on market levels, now do.
In February, Profit & Loss reported that GTX had partnered with Ideal Prediction, an independent trading analytics and data science company, to offer its clients analytics aimed at optimising their FX trading.
GTX first hired Ideal Prediction to optimise client liquidity pools and trade execution performance in March 2016 and the perceived success of this project, combined with the management teams’ strong working relationship with Ideal Prediction CEO, John Crouch, from his time working at Credit Suisse, prompted the two firms to look for more ways to utilise the data at GTX’s disposal to help its clients.
The end product of this was the analytics tool that GTX began offering to firms in February.
The major liquidity providers in FX are looking at their client tail - and the sharper, or smarter, traders are being cut. Part of me thinks these traders should take their chances with the other professionals, but I am worried that some - as evidenced by a recent conversation - have this view about asset managers and corporates. Of course tensions exist in relationships between provider and consumer but the solution should be simple and not to the detriment of the wider world.
On the day that the second and final phase of the FX Global Code of Conduct was released, panellists at Forex Network New York debated whether it puts an unnecessary burden on buy side firms.
Philip Weisberg, a member of the Market Participants Group (MPG) that helped craft the Code, stated that it “puts an enormous responsibility on the buy side”.
Giving an example of this responsibility, he pointed to last look, a practice that some platforms do not allow and others allow to be implemented in a variety of ways. The platforms must disclose their last look policies, meaning that buy side firms need “to have some type of framework for evaluating the efficacy of a venue or liquidity provider choice or execution choice”, Weisberg explained.
As the distinction between bank and non-bank liquidity continues to blur in FX, panellists at Forex Network New York discussed how market participants should differentiate between different liquidity providers.
Speaking at the event, Kevin Kimmel, global head of e-FX at Citadel Securities, claimed that when it comes to liquidity, the bank versus non-bank narrative “has played out” as a distinction between market makers, with clients instead focusing on the core attributes of each firm, such as their reliability and whether they warehouse risk.
Cürex Group is introducing microsecond timestamp confirmations for its clients’ trading activity.
In a release issued today, the firm says that the rollout underscores the firm’s mission to support the best execution standards required under Mifid II, which will take effect in January 2018.
In addition to these timestamp confirmations, the post-trade analytics allow its customers to “walk the book” backward and forward by the microsecond to study the market before execution and after to try and gain deeper insight into their trading impact.
Firms are increasingly demanding more sophisticated tools around FX execution analysis, explains Petra Wikström, global head of execution and alpha solutions at BNP Paribas.
Wikström says that for some time, firms have been looking at post-trade analytics to help improve their FX execution but that, increasingly, they are shifting their focus towards pre-trade analytics.
“Now a lot of the demand is coming in the pre-trade understanding of market impact: how it trades over the trading day across currency pairs, across time zones, across trade sizes, but also coming into that are whether there any differences across different venues,” she says.
A number of factors, including the increased need for an audit trail for FX execution and a desire to limit market impact, are driving the adoption of algorithmic execution tools amongst buy side firms, says Petra Wikström, global head of execution and alpha solutions at BNP Paribas.
Although Wikström says that the continuing automation and electronification of the FX market naturally leads to more firms broadly using algos as one of their execution tools, there are other specific factors driving the adoption of algo tools by the buy side.
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.
Just eight months after releasing its first post-trade execution analysis product, BestX has rolled out its much-anticipated pre-trade execution analysis functionality.
The release helps the firm, which was co-founded by former Morgan Stanley staffers Pete Eggleston, Oliver Jerome and Aman Thind in early 2016, deliver on its vision of an end-to-end best execution service, as Eggleston explains. “We look at best execution as a lifecycle event where you can look at a trade or portfolio of trades throughout the cycle."
Although Greg Wood, SVP, global industry operations and technology at the Futures Industry Association (FIA), says that technology is increasingly causing FX to trade in smaller sizes, he explains that experience in other asset classes shows that this doesn’t necessarily mean that liquidity is diminishing.
With more trading firms using algorithmic execution tools to slice up large FX orders into smaller amounts to reduce market impact, this could potentially create a cyclical pattern where the amount of small orders going through exacerbates the impact of larger orders, forcing firms to execute in smaller and smaller sizes.
“It is to a degree a vicious circle and to a degree we’ve seen it happen in other asset classes, such as futures and equities,” says Wood.
Paul Aston, CEO of Tixall Global Advisors, discusses the feasibility of peer-to-peer FX matching between large buy-side firms.
One of the long-standing problems with the concept of peer-to-peer matching between buy-side firms is that the probability of being able to actually put together complimentary buyers and sellers is very low. For example, the chances of a large asset manager needing to sell a certain amount of a particular currency at the exact same time that an insurance company needs to buy the same amount of that currency are remote.
Aston refers to the need to “get away from the quantum problem of having to know when something is available in time and level”, and suggests that there needs to be some form of “dark mechanism” whereby these buy-side firms can leave an order without it being exposed to the market, in order to make peer-to-peer trading more feasible.
The Alternative Investment Management Association (AIMA) has published a guide for alternative investment managers to help them understand and implement the enhanced best execution obligations under the European Union’s updated Markets in Financial Instruments Directive (MiFID2), which will apply from January 2018. AIMA’s MiFID2 Best Execution Guide, which is only available to AIMA members, outlines the MiFID2 obligation to achieve the best possible results when executing transactions. These rules were originally introduced under MiFID1 and have now been enhanced in a number of areas.
Citadel Securities has partnered with BestX to provide its clients with independent analysis of its FX execution quality.
"We're confident in the quality of our execution and partnering with an independent TCA provider demonstrates this. From a market structure standpoint, I think that the FX market can benefit from more transparency, whether it's through independent measurement of execution quality or the creation of a central tape," Kevin Kimmel, global head of e-FX at Citadel Securities, tells Profit & Loss.
Kimmel says that providing independent TCA provides value because it eliminates any potential concerns of bias in the execution analysis and because it helps create standardisation in terms of how the analysis is conducted.
A study released by Deutsche Bank seeks to challenge the assumption that having more liquidity providers in an aggregator inevitably leads to better execution.
Aggregators are popular in the FX market, enabling trading firms to routinely put multiple liquidity providers in competition and then transact with the one offering the best price. Being able to consolidate liquidity, in the form of bid and offer prices and amounts, from various sources into a single, consolidated order book is particularly valuable in an OTC market with no centralised exchange.
“But in a market where the terms of trade are privately negotiated and the liquidity provided is bespoke to the trader, deciding on a suitable aggregation setup is not a trivial task,” according to the report, titled “Execution in an Aggregator”.
While I am generally unconcerned about the FX industry's preparedness for MiFID II - it has a long and proud history of hitting deadlines - I am bothered by a potential psychological impact from the legislation. Too many are looking at TCA in the light of MiFID II and thinking "box-ticking", to the extent that TCA reports are left unread and even un-opened. The data is good, and it should be used to make execution better, not to fulfil a compliance exercise.