ITG has brought a foreign exchange TCA product to Asia that aims to help the buy-side analyse and manage FX transaction costs.
The firm has published research that indicates big Asian funds could be each losing more than $30 million per annum on foreign exchange linked to equity trades and those losses could be saved through better management of FX.
Its analysis showed that for ten of the largest global buy-side firms, the difference between trading FX as a consecutive leg of the equity trade and managing it at the time, rather than handling aggregate FX later in the day (which is common practice, but typically results in a worse price), equates to an annualised cost difference of over US$ $27m per year, per fund.
ITG’s analytics group has built a data feed combining pricing information from 17 different sources (12 banks and 5 electronic communication networks), against which FX trades can be benchmarked. This they say, is the first step in identifying how and where costs in FX trading arise, and ultimately how the buy-side can reduce those costs. Analytics can then be used to act on that information and improve FX trading around equity transactions accordingly.
Firms with an Asian bias where the majority of their trades require an FX leg and those covering emerging markets where FX spreads are wider and liquidity is lower, are likely to face even higher costs and a greater variance between the top and bottom performers.
One of the biggest challenges the investment industry faces is a lack of centralised FX pricing, making it difficult to identify whether a reasonable outcome has been achieved on a trade. Being able to measure actual price against market availability is the first step in being able to manage the associated processes and costs of the FX trading, according to ITG.
Ian Domowitz, ITG’s global head of analytics, sees transaction cost analysis of FX as a fast growing area of focus for the buy-side, and predicts the trend will continue into the development of tools to help reduce FX costs, similar to those seen in the equity markets, such as FX algorithms.
“Clients are interested in FX TCA – as there is a lack of transparency in the market and a lack of understanding about whether the prices they are getting are fair,” he said. “There is also the notion that they’d trade differently if they understood how these costs changed over the course of the day, if they were equipped with pre-trade information and analytics.”
Another vision of the future for foreign exchange in his opinion is the possible evolution of block crossing platforms similar to those seen in the equity markets. If they emerge, it would allow buy-side firms to manage their currency exposure at fixed levels at specific points in time, without the need for negotiation and corresponding information leakage.