No One Answer for FX TCA
Asset managers who look to solve their transaction cost analysis problem for their FX trades should prepare to hit a moving target.
Implementing a TCA process to meet MiFID II’s January 3, 2018, implementation deadline is not a “once and done” situation since TCA is not an exact science yet, according to Harpal Sandhu, CEO of Integral.
“The mandate will come out, or the rules will go into effect first, and then people will do the minimum at first,” he told Markets Media. “As they become educated, they will demand more and more from their service providers, and their service providers will continue to improve their services.”
Sandhu also expects that TCA’s evolution in FX will take some time as its driver, MiFID II, is principles-based rather than prescriptive regulations.
“People have quite a bit of latitude of interpretation of those principles,” he said. “And some people will interpret them much more quantitatively than others. Over time, the regulators and market participants will define what TCA is supposed to look like and exactly and what the rules and the responsibilities are for market participants.”
The industry may not have reached consensus on which methodology the industry should use in calculating TCA in FX, but they all are reaching for the same answer.
“It always comes down to that question: Was I treated fairly and how much was I charged for the service that was provided to me,” said Sandhu.
However, how everyone asks that question differently because everyone has their unique requirements and nothing is ever an apples-to-apples comparison, he noted.
“Even though a particular trade with a certain trader might be for one million euros, it might be part of a much larger trade, 15 to 20 million euros, you are executing that trade more broadly, and it is going to impact the market in other places,” he explained.
By gathering enough execution data, Sandhu expects that FX TCA calculations will answer what is the absolute best outcome that the customer could have expected, what the realistic outcome based on history as to what the customer should have expected, and what did the customer receive eventually.
Whether portfolio managers or buy-side traders will choose to include their order’s intent into their TCA calculations will depend on what they want their TCA to achieve.
“If you’re asking that TCA of just that one child order then the answer is ‘No.'” he explained. “If you’re asking for the TCA of the parent order then the answers is ‘Yes.’ And if you’re asking for TCA or the response from the market, in general, using a particular system then the answer is ‘Yes.’ If you’re asking for the response from one particular counterpart, the answer is ‘No.'”
Making these sophisticated decisions only will become more important, and firms will have to take more responsibility for themselves as they define their TCA process to their stakeholders.
As with most things, Sandhu anticipates there will be firms that excel and those who will need help.
“We have customers who understand TCA extremely well, push the limits of our big data and our analytical engines, and write some very very insightful analyses of how their trading is performing,” said Sandhu. “We have others who are just at the beginning stages of learning, and they ask us for advice as to how should they look at this, what appropriate standardized report they should use, and so on.”
Algorithms have become more prevalent in the spot FX market.
Global Foreign Exchange Committee has made recommendations on Last Look.
There is a growing demand for transparency in FX trading by regulators.
CLS has also enhanced its existing suite of alternative FX data products.
FX Global Code sets out good practice for last look and provides illustrative examples.