Larry Tabb
Larry Tabb

FX Transaction Cost Analysis: Reality or Pipedream?

Larry Tabb outlines why there will be greater pressure on dealers and execution platforms to open their data and generate the metrics needed so firms can truly measure their trading costs.

First Published: e-Forex Magazine 24 / Features / July, 2006

Transaction cost analysis, is exactly like its moniker, it analyzes the cost of execution. This intuitively seems simple. If the broker charges a $1,000 for execution, isn’t the execution cost $1,000? Well, not really. To accurately measure the cost of execution you need to measure more than broker commission and fees. Execution cost is typically segmented into two major categories: explicit and implicit costs. Explicit costs are fairly easy to measure in a transparent market. They are brokerage commissions and spreads. If the broker charges you $1,000 and you bought at the offer, your explicit cost would be $1,000 plus the spread.Calculating implicit cost however is much more difficult. Implicit cost is typically split into market impact, delay, and missed trades. Market impact is the affect the order had in the market, or how much a buy order has pushed the market higher / sell order has pushed the market lower. Delay, is the amount the market has moved between the acquisition decision and the...continued

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