Buy-side firms are increasing their use of transaction cost analysis (TCA) in the FX market to improve alpha generation, according to a report from consultancy Aite Group.
The report said the development mirrors a trend seen across asset classes where TCA is no longer simply being used for compliance but also to help improve investment performance.
More than three quarters of buy-side investors are using TCA in multiple asset classes, Aite’s research found, while 10% only use TCA in equities and 14% were not currently using TCA.
Qualitative research also found that a growing number of firms are hiring third-party TCA consultants to help them better utilise the FX transaction data they have gathered.
Institutional investors are demanding highly detailed information from their FX TCA data, with 76% saying they are using time stamps to get as much granularity as possible. The frequency at which TCA data is reviewed is also becoming critical for the buy-side, with 65% analysing information on a quarterly basis, while 23% look at their data monthly.
Aite suggests that this is due to improved industry-wide education over the value of FX TCA in the past year, which has led to increased awareness in the front-office of what can be achieved from robust analysis of transaction data.
This analysis is being used by firms for a number of purposes, from regulatory reporting through to evaluation of brokers.
TCA information collected by the buy-side is being used to evaluate service providers in response to the execution performance they are able to achieve. Aite’s survey of buy-side institutions found that 82% are using their TCA data to evaluate the quality of providers, with 41% using it to reward or reduce business with particular providers.The report said that, while FX TCA is catching on the industry, providers could still do more to ensure it becomes an integral part of their broader investment process, rather than simply a way to internally evaluate the performance of traders themselves.