LMAX Exchange CEO, David Mercer, explains that some market participants need to take a deeper look at their FX execution in order to improve it.
Discussing the findings of a whitepaper published by LMAX Exchange earlier this year, Mercer says that too often buy side firms only look at fill ratios and spreads to judge their execution quality.
Instead, Mercer advocates using five key metrics provided by each liquidity provider and trading venue being used by that trading firm to judge execution quality.
“Put simply, you should know what you’re bid/offer spread is, you should know what your fill ratio is, you should know what your hold time is and, more importantly, you should be able to value that hold time.
“Our analysis is that one hundred milliseconds of hold time is twenty five per million – on average – and it’s non-linear in that ten milliseconds is fifteen dollars per million, and that’s a lot in spread terms and after that you need to look at price variation, are you getting price improvement? Everyone knows about slippage but are you getting price improvement?
“With us as a central limit order book you get that as a standard. So value that, add it into your cost analysis. And then lastly you look at market impact, but that’s more about your future trading rather than the historic trading, but the historic trading will give you a guide to how you should do it going forward. So when you add that all up we look at it and say that perhaps as much as seventy five percent of the cost of trading isn’t being calculated today,” says Mercer.
You can watch the full interview, in which Mercer goes into more depth about improving FX execution, here: