Institutional investors are pressing for greater visibility on FX prices from brokers via equity-like transaction cost analysis (TCA), but still accept that the best service is based on an in-depth relationship with sell-side partners.
At a panel session on the final day of the TradTech 2013-London conference focused on integrating FX into a multi-asset execution strategy, panellists confirmed that 'nuisance' FX trades were now receiving more attention and investment on buy-side desks.
Jenny Bloomfield, senior FX dealer, BNP Paribas Dealing Services, said there was a "greater awareness" of the negative impact on a portfolio's P&L from a badly executed FX deal.
But Richard Coulstock, the Singapore-based head of dealing at Eastspring Investments, said he had initially experienced "push back" from brokers when he asked for more detailed benchmarking of his FX executions, a request he began to pursue with persistence around 18-24 months ago, partly in reaction to legal cases brought against a number of custodians over their FX services to institutional investors.
"The data was not necessarily that helpful, partly because of the differences in the reports we received from brokers, but there was a psychological advantage from alerting the brokers to the fact that they were being measured," he said.
Broker reluctance notwithstanding, Coulstock added that even benchmarking the spot FX prices provided by different brokers could be complex, explaining that Eastspring had at least three different approaches to trading spot FX, with one – executing via standing instruction – separated into two further sub-categories. With each of these types of spot FX trade subject to different processes and technologies, comparison requires significant effort by the buy-side trading desk, said Coulstock.
Rob Maher, global head of fixed income electronic sales, Credit Suisse, pointed out that spot is just one – and the most plain vanilla – among the gamut of FX services provided by the sell-side.
While acknowledging that TCA could be effective where FX trading was most liquid, and therefore most similar to equities, Maher added: "Best execution is a much more complicated scenario in these other FX products. It will always be subjective, which is why you need a trusted partner. FX is pretty complicated when you're talking about the whole spectrum. "
This point was taken further by Andreas Anschperger, director of European FX and fixed income trading at Allianz Global Investors, who believed that the more integral role of FX in the buy-side's approach to alpha generation – emphasised particularly in the current low-return environment – required the sell-side to adapt their service models. Because the value a broker provides to his clients stems from an increasingly wide range of services, liaison of sell-side sales teams across asset classes is imperative. "We want a far more holistic approach from our brokers," said Anschperger.
Agreeing with Bloomfield that even measuring FX execution performance via TCA involved some subjective judgments, Anschperger said the source of the trade – reactive, passive hedging or market order, for example – needed to be considered and the technology framework fully tested for TCA to be produce effective measurement. "It's most important that the trading desk has the level of close interaction that ensures understanding of PM's objectives," he said.