The ability to quantify best execution with finer granularity is possible thanks to transaction cost analysis (TCA) systems. This has become especially true in non-equity asset classes like FX.

“FX TCA is growing and developing rapidly,” said Jim Cochrane, product manager for FX TCA at ITG. “When FX TCA came along, initially there was a push just to cover your bases for compliance purposes. But whereas It took years for equities TCA to develop as a mature product, FX TCA is developing quickly.”

TCA will assume greater importance in FX as asset management firms move from analyzing trades to incorporating analysis into their trading management and alpha-generating processes, according to a survey by Aite Group of buyside TCA users.

TCA providers have aggressively moved to provide greater transparency around order routing decisions, algorithm performance, peer group reviews, and multi-asset class trading. Market participants are demanding that real-time TCA data get fed back into their algorithms and electronic trading platforms.

“We believe today is only the dawn of the FX TCA industry growth phase, and it will take some time for the various TCA solution providers to come up with common standards and benchmarks for FX transaction performance measurement and analysis,” said Howard Tai, senior analyst for institutional securities and investments at Aite Group, in a statement.

FX TCA is hampered by fragmented sources of liquidity, which limits the granular market data that’s needed for analysis, according to Aite Group.

“It’s not at the stage that equities are simply because there’s no tape with FX,” said Bill Conlin, president and CEO at Abel/Noser, a TCA provider. “But we can now measure FX. If somebody can give us a timestamp, we can measure it against the time-weighted average prices of the public FX trades that are available from Bloomberg and other sources.”

TCA for FX provides information at a much more granular level than execution analysis, according to a blog by Cochrane. Execution analysis focuses on the trade in near-real time. It gives immediate feedback for the trader that he received the best price in the market given his pricing stream,” he said in a blog. “It can also measure how much he gave away to choose another provide in order to manage liquidity and allocate trades across his board of FX providers.

What it does not provide is a look at the monthly or quarterly trends across currency pairs, counterparties and trading styles. “It shows you that you chose the best price among the prices that the banks on your trading platform allow you to see,” Cochrane said in his blog. “A complete trade cost analysis shows you your trade executions across a longtime period against all of the prices available in the market.”

In equities, best execution can be hindered by decisions that take place far away from the trader’s desk.

“The difference between good trading and what we’d consider mediocre or high-cost trading is quite often not the trading desk, and not the broker,” said Conlin. “It’s the portfolio manager. You’ve got the momentum guys that come in after the stock’s been up. Some of them jump on it early enough where they get good executions. Others are very late in that momentum curve. All momentum’s gone by the time they’re finished.”

Featured image via COSPV/Dollar Photo Club