The convergence of algorithmic trading and transaction-cost analysis (TCA) is transforming foreign exchange trading by making it possible for market participants to more accurately measure trade execution quality which, in turn, ensures improved executions going forward.
Investors and corporates active in FX markets have been increasing their focus on FX execution quality. The emphasis on best execution will only increase with the emergence of the FX Global Code (FXGC), a set of global best practices developed by central banks and market participants “to promote the integrity and effective functioning of the wholesale foreign exchange market.” Among the many provisions in the FXGC is a move to standardize the data associated with algorithmic trading strategies and TCA.
“Data standardization enabled by the FXGC will drive the continued adoption of tools like execution algorithms and TCA,” says Stephen Bruel, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of FX Global Code to Drive Algo Adoption. “In addition, it will empower market participants to source a broader range of liquidity and better assess the quality of execution they are receiving from brokers.”
The fragmented nature of the FX spot market lends itself to algorithmic execution. Although fewer than 1 in 5 market participants currently use algorithmic trading in FX, approximately 70% expect algo use to climb.
“By enhancing both liquidity and transparency, the further adoption of TCA and execution algorithms in the FX market will allow the buy side to gain even more control over their execution quality going forward,” says Stephen Bruel.