Roger Aitken
Roger Aitken

Validation and Compliance: applying new toolsets for more effective TCA in FX

Transaction Cost Analysis (TCA) has been embraced by the equities world for nearly twenty years, with the majority of buy-side trading firms expending considerable resources measuring just how well they executed on their share trades. Despite some reservations over whether TCA can evolve beyond a process useful in compliance and high-level performance assessment and into a tool capable of generating actionable and real-time analysis, few can ignore its benefits. While TCA has been fairly invasive across the equities space, demand for similar services is also picking up in the foreign exchange markets as many asset managers may have underestimated the impact of FX trade execution on investment returns, particularly with respect to secondary FX trades associated with underlying securities (equities, derivatives, etc.)

The need for greater insight and transparency in FX trade costs is naturally evolving and spreading out to hundreds of FX trading firms. And, firms who lay claim to offer cutting-edge execution on foreign exchange products are utilising the results of TCA as something of an extra marketing tool - in addition to internal performance evaluation purposes to identify areas for basis point improvement on portfolios.  The recent high profile $200m litigation case involving CalPERS (California Public Employees’ Retirement System) has also brought into some sharp relief issues facing some asset management companies, particularly those managing institutional assets of large U.S. pension plans. Clearly, they need to look carefully today at how they execute FX trades. “It’s fair to say that many managers did not regard how they executed their FX trades as being of any great material importance to their investment returns,” says Robert Kay, former CEO of GSCS and Head of Analytics,...continued

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