TradeTech FX Europe 2023: Current TCA models are not going far enough to explain market impact

Panellists agreed more work is needed to improve TCA quality and use during volatile market conditions in order to source quality liquidity; queried the usefulness of a consolidated tape.

Speaking on liquidity-focused panels on day 1 of the TradeTech FX Europe conference 2023 in Paris, speakers were unanimous that greater transparency is needed in order to enhance liquidity access and aggregation during volatile market conditions.

Success during market volatility is hinged on enhanced data access and quality, but models are currently being found lacking.

In an audience poll taken during the morning’s panel exploring liquidity dynamics, 83% of respondents said TCA current models were not going far enough to explain market impact and the potential influence on the outcomes of a trade from pre-hedging risk.

“TCA has come a long way and every buy-side firm is using it for the right reasons,” one panellist said. “But when you’re talking about mid it doesn’t tell you about the lead up. TCA has a long way to go around pricing insights around market impact. Everyone is getting mid – you hear it all the time – but not everyone can be doing so.”

Essential to the future of TCA offerings, said one panellist, is the incorporation of a central limit order book (CLOB) for price discovery benchmark swaps. Panellists agreed a CLOB is needed for swaps – a typically less electronified market than other instruments – but concluded that a current hurdle to the adoption of one was incumbents not wanting the current market structure to change.

TCA offerings are not being used to the best of their advantage by users, said one panellist.

“The data is there now. Some firms don’t know there are multiple metrics to look at. Performance vs arrival is the most important. Other important metrics include market impact and market direction, reversion and child spreads. When users of the analytics start asking to see these they’ll know if an algo is smart.”

Also flagged by panellists was the need for a better understanding of rejects, liquidity provider selection, and internalisation.

“Everyone says they’re internalising but how are they doing it? It’s important to take that into account,” said one speaker. “There needs to be more data driven discussion. We need to look at the big picture and understand what the market looks like.”

Panellists agreed the long-term effects of the SA-CCR regulation, implemented in 2021 – with the aim of bringing a more standardised approach for measuring counterparty credit risk exposures – would likely soon begin to show and to stress the need for better TCA offerings.

Consolidated tape

When asked about the usefulness of a consolidated tape in FX to enhance data access during times of stress, panellists agreed that it wouldn’t resolve issues around sourcing quality liquidity and could actually go as far as to be harmful should the deferrals not be negotiated properly.

“It could be useful but the level of delay is critical,” argued another. “I’m not sure what the upside is. We have data reporting for EFs and forwards and does anyone really look at that?”

“The knock-on effect could make spreads less liquid,” concurred another speaker.

Buy vs build

Speaking on another panel exploring the next phase of liquidity aggregation and data processing panellists discussed the potential to either buy or build data and analytics focused offerings.

“Most people have been burned by buying. There has been a shift to building your own analytics offering,” said one panellist. “The flipside of that argument is that there is demand for standardisation of data as well, especially around algorithms. If you want to compare them generically then you will need to buy.”