Buy-side Demand For FX TCA Gains Traction

Transaction cost analysis in foreign exchange is gaining traction amongst the buy-side according to a new survey as Bloomberg has launched a new tool to help calculate the full cost of FX trades.

The unprecedented volatility since March has increased buy-side use of TCA tools according to a survey from consultancy Aite Group. Authors Christian Benson and Yue Malan said in the report that TCA is becoming part of the pre-trade analytics used by traders to decide on their strategy and becoming more necessary to meet best execution requirements.

“FX trading platforms constantly improve trading analytics as an effort to help buy-side clients assess trading performance and analyze transaction cost,” added the report.

The study gave the example of FXall’s Trade Performance Analytics, launched in February last year. The tool started to offer spread data across its request-for-quote platform directly to clients in June this year so they can analyze spread costs against liquidity providers’ quotes.

“Modern TCA tools equipped with emerging technologies, such as artificial intelligence, machine learning, and pre- TCA capabilities, remain key differentiators among TCA vendors,” added the survey. “However, usage of pre-trade TCA by buy-side firms is still limited as a large portion of buy-side traders mostly care about post-trade TCA, and some of them use only the quarterly TCA reports.”

The interest in TCA is highlighted by Bloomberg announcing a new tool to help calculate the full cost of foreign exchange trades on FXGO, its electronic trading platform on the Bloomberg Terminal. FX trades may often be associated with additional costs such as prime broker fees, custodial fees and banking charges. Pictet Asset Management is one of the first Bloomberg clients to use the tool.

Tod Van Name, Bloomberg LP

Tod Van Name, Bloomberg LP

Tod Van Name, Bloomberg’s global head of FX electronic trading, said in a statement: “Trying to determine the total cost of a trade involves detailed and time-consuming mathematical calculations. We are taking that burden off the client and helping them see the total cost at the point of execution.”

Use of algos

Aite also found that buy-side use of algos surged in March as volatility increased. FXGO’s average daily volume was 30% higher in March then the typical average, and algo trading volume was 2.5 times high than in January according to the report.

In addition, algorithms allow managers to demonstrate best execution, gain operational efficiencies, and enhance performance.

“Algo flow for FX spot on trading platforms is up approximately 5%,” added the report. “Banks continue boosting investment in algo development with emerging technology, such as artificial intelligence, and expanding algo offerings to the non-deliverable forward market.”

NDFs are derivatives that are used to hedge or speculate against currencies where exchange controls make it difficult for overseas investors to make a physical cash settlement, for example, the Chinese renminbi.

The report continues that while the use of algorithms is fairly mainstream on the sell side and the larger end of the buyside, other buy-side players, such as corporations, smaller managers, and pension funds are beginning to use them.

“Algo usage has also played a role in optimizing liquidity for the growing trading volume in emerging market currencies beyond the G-10,” added the study. “Currently, approximately 18% of spot trading on Bloomberg is done algorithmically, and this is expected to increase to around 30% in the next few year.”

Algo trading is even becoming more mainstream in NDF markets despite the challenge of the wide range of liquidity levels for each currency product and liquidity concentrations for certain dates according to Aite.

“NDF algos are increasingly available on banks’ single-dealer platforms and multidealer platforms, but they are still in the early days.” added the survey. “Electronic trading depends on efficient price discovery backed up by proper data management, and the developments over the past two years mean that many banks now see NDFs as a growth area.”

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