FX REPORT: Trade Cost Analysis Coming to the Currency Markets

Trade cost analysis (TCA) is finally coming to the forex markets.

After years of being a staple in the equities markets from several firms, TCA as a measurement tool is about hit the currency trading markets, helping those traders and firms better manage their costs and improve efficiency. That’s the opinion of market consultancy Aite Group, which predicts in its latest report that the dawn of the FX TCA industry has just arrived.

Research from Aite Group in its latest report, “FX Transaction Cost Analysis Providers: Brave New World!,” examined some of the key challenges faced by foreign exchange transaction cost analysis (FX TCA) providers and their customers. But vendors should have no fear, Aite noted, as the buyside community’s growing acceptance of FX TCA promises there will be users of the new tool.

Aite Group conducted a survey with a representative sample of buyside FX TCA customers around the globe regarding their views on the quality of FX TCA tools available as well as their outlook on the current state of the FX TCA industry. The overall quantity of data that must be analyzed for FX TCA seems to have increased substantially over the past few years, but the overall quality of that data has not necessarily followed suit.

Howard Tai, senior analyst at Aite and who was involved in the survey, noted that TCA will be immense in the FX space as asset management firms move from analyzing trades to incorporating that analysis in their trade management and alpha-generating processes. Furthermore, market participants have a genuine demand to see real-time TCA data feeding back into their algorithms and electronic trading platforms for further fine-tuning purposes.

“FX TCA can be significantly hindered though by system limitations largely due to latency technology and fragmented sources of liquidity, which is unable to return the granular market data that is needed for certain analyses.,” Aite noted in its report.

Despite these and other difficulties, TCA providers have aggressively moved forward over the last few years, attempting to provide more transparency around order routing decisions, algorithm performance, peer group reviews, and growing support for multi-asset-class trading activities.

“As TCA continues to grow and expand into other asset classes, it is important that the industry (TCA providers, brokers, and TCA end users) work together to establish standards and consistency related to accurate time stamps, methodology, and benchmarks,” Aite said.

“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,” Tai said.

The full report is available via Aite Group.