For institutional asset managers, measuring foreign exchange trading costs has become imperative as the global FX market moves electronic.
The emergence of FX transaction costs analysis (TCA) is directly attributable to the spread of algorithmic trading from equities to other asset classes, with FX being the prime class next in line. However, there are hurdles to overcome in the transition. Unlike equities, FX trading is primarily over-the-counter and doesn’t offer the consolidated pricing or information on transaction sizes available with stocks.
Especially for traditional long-only asset managers, where FX trades are often used to hedge currency risk on equity trades, the need for FX TCA has only recently become apparent.
Sachin Barot,
FlexTrade
For such managers, “an FX trade occurs as a result of a global equity trade,” Sachin Barot, vice president of sales at trading systems provider FlexTrade, told Markets Media. “Real money managers are looking for the same transparency as in the equities markets. They need the ability to compare their FX execution price to a benchmark and our TCA product gives them that capability.”
To adequately tackle the problem, buy-side firms need reputable execution management systems that are multi-asset in design, can aggregate fragmented FX liquidity pools onto a single platform, and offer advanced real-time and post-trade analytics.
“We've been getting a lot traction in the FX space, because we not only provide streaming pricing where these asset managers can look at multiple banks when they're executing, but we’re also warehousing that data and providing FX TCA,” Barot said.
FlexTrade addresses FX TCA via its FlexTRADER EMS. Designed to handle all asset classes (equities, FX, options, futures and fixed income), FlexTRADER’s FlexFX component aggregates FX liquidity, and it’s FlexTCA component provides real-time and post-trade analytics to measure the performance of traders, algorithms and strategies.
“On our EMS you can trade with any liquidity provider you choose and perform real time or historical analysis using FlexTCA,” Barot said.
Tier-2 banks struggle to compete with major FX banks without trained sales and trading personnel, even if they possess state-of-the-art electronic trading systems, according to a report by Aite Group. Yet in general, Western FX market participants should invest more heavily in the electronification of FX swap activity, particularly in the Asia-Pacific.
“Banks should broaden their base of business well beyond corporate clients, retooling FX capabilities to manage API-driven risk and distribute prices more broadly," Javier Paz, senior analyst in wealth management at Aite Group, said in a release. "Therefore, it's important that they build relationships with FX technology firms, prime brokers, and up-and-coming electronic FX venues to remain competitive."
FlexTrade has been gaining traction with its FX TCA product on the sell side as well as the buy side. Singapore-based United Overseas Bank Limited (UOB) has implemented MaxxTrader and FlexFX to facilitate global FX trading. In conjunction, UOB has also implemented FlexTCA for real-time and historical transaction cost analysis.
The year 2015 will see “more in terms of structure and mandates on how firms are going to trade FX,” Barot said. “As such, they're going to need this complementary product in order to show they are in compliance and not just getting an end-of-day price or some indicative price over the phone, but are actually able to see what they're getting at that moment in time.”
