Xavier Alexandre Head of Hotspot FX Europe and Asia
Xavier Alexandre Head of Hotspot FX Europe and Asia

Transaction costs – quantifying the value of electronic marketplaces

Xavier Alexandre assesses how the benefits of Transaction Cost Analysis might be extended to FX market participants.

This article will look at how to adapt to FX markets an essential concept from equi-ties: transaction cost analysis. Transaction Cost Analysis (TCA) in equities has benefited the buy-side enormously and we shall try to extend these benefits to FX market participants.Definition of transaction costsLet us first define transaction costs., Transaction costs can be defined as the differ-ence between the theoretically attainable best rate (see graph below) and the effec-tive, or actual, execution rate of the client.The theoretically attainable best rate is the best bid or offer across markets for the amount under consideration. Naturally, transacting at that rate is exceptional, but this rate is a useful benchmark..The effective execution rate varies as a function of the amount to be dealt, the time it is dealt, the market structure at the time of dealing, the creditworthiness of the client, where or with whom the trade is executed, or the per-ception the market has of the amount and direction about to be dealt.As...continued

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