The value of FX TCA is not technical: It goes to the heart of client relationships

Despite the rapid uptake of algorithmic trading and execution within all cash-centric capital markets globally since 2010, wide-ranging use of transparent, unbiased transaction cost analysis (TCA) services and software applications within electronic cash FX trading specifically remains problematic for buyside firm currencies liquidity consumers and sellside institution currencies liquidity providers. For sellside cash FX execution franchises, the role of TCA offerings as a complement to algo execution service offerings in terms of its ability to enhance the broker / client relationship remains greatly important from both a strategic service offering and technology investment budget perspective.

The value of FX TCA is not technical: It goes to the heart of client relationships
Willis Bruckermann

However, global capital markets consultancy GreySpark Partners believes that, in the post-trade space, cash FX TCA does not yet provide ample opportunity for sellside front-office execution franchises to deliver competitive differentiation. However, on a pre- and at-trade basis, cash FX TCA applications and services have evolved to a point of sophistication in 2019 such that they are now capable of offering meaningful-enough commercial benefits in enhancing client execution decision making and trade outcomes. 

Given TCA’s overall origins as a line of service within in the ex post facto post-trade space across all applicable asset classes, GreySpark’s assertion of limited scope for differentiation in post-trade cash FX TCA, specifically, may appear counterintuitive. However, sellside currencies liquidity provider assertions in 2019 that buyside liquidity consumers continued to gravitate toward independent third-party FX pre-, at- and post-trade TCA providers throughout 2018 and 2019 are not within merit.

In GreySpark’s view, larger numbers of asset managers, hedge funds, institutional investors, investment managers and wealth management firms will continue to utilise independent FX TCA services providers – albeit via the skin of sellside execution franchise overlays – over the next three-to-five years. The demonstrated preference of those clients for independent post-trade TCA providers derives from both technical issues and contemporary relationship dynamics among sellside cash FX execution franchises and their clients. 

The technical challenge currently restraining the robustness of sellside post-trade FX TCA services is the lack of breadth in the market coverage of their analysis. In a highly fragmented liquidity and execution venue landscape, sellside FX TCA benchmarking arguably fails to incorporate a sufficiently broad market scope when evaluating execution through the lens of liquidity provider services. This failure, in turn, often results in misleading analysis results (see Figure 1).


Furthermore, buyside FX clients seek post-trade TCA as a means of incorporating the full breadth of their FX trades – across all trade execution service providers used as well as from any direct connectivity into FX liquidity pools they may gain through their own in-house technology stack – and thus not be limited in viewing analysis of all trades done, as opposed to only those trades executed via a single liquidity provider. For a single sellside execution franchise to overcome this challenge and, in doing so, provide comprehensive post-trade FX TCA requires buyside firms to turn over significant amounts of execution quality data with all the other liquidity providers that they utilise just to garner perspective on the execution quality provided by a single broker-dealer. 

Although technologically feasible, buyside clients do not want a sellside execution franchise to have such a comprehensive view of their trading behaviour. Put simply, buyside clients do not trust banks with this information, fearing that that the insights derived from their full trading activity and behaviour would be used against them, thus eroding execution quality. 

Empowering client adoption of Low-Touch trade execution services

At issue is a fundamental, persistent lack of trust within the global buyside cash FX liquidity consumer community that sellside broker-dealers are amply incentivised by the opportunity to competitively differentiate their FX trading services via the provision of pre- and at-trade TCA, and that the provision of such services is ultimately a means by banks of protecting their clients’ best interests.

What is of benefit for buyside firms and sellside FX liquidity providers alike, however, is the provision of high-quality TCA offerings that serve as a means to facilitate algo currencies trading adoption by clients, which in turn allows the sellside industry to incrementally increase the corresponding whole of the client community’s confidence in and adoption of increasingly sophisticated algo-centric, agency execution offerings over time. Thus, high-quality, actionable TCA information services play a role in driving home the benefits of algo-trading adoption by both clients and their corresponding liquidity providers.
In this paradigm, buyside clients benefit from quality pre- and at-trade TCA offerings in that such information enhances the trust in and confidence of using algos – generally – for currency trading execution, while simultaneously facilitating the selection of the most appropriate execution tools and parameters available from their sellside execution franchise provider on a trade-by-trade basis.


In this regard, sellside broker-dealer FX algo trading offerings are now increasingly complex across three distinct levels:

  1. the breadth of service providers offering execution algos;

  2. the number of algos, each promising distinctive execution qualities, from any given vendor; and

  3. the complexity of algos from a user perspective due to the deployment of algos with a growing number of customisable parameters within a given algo.

For example, the growing pervasiveness of FX algo wheel offerings by sellside broker-dealers in 2019 showcases how the randomisation of specific execution parameters provides both vendors and clients with real-time insight into trade execution on an at-trade TCA basis. Furthermore, the unbiased data generated by the algo wheel execution process provides a valuable input for pre-trade TCA models and the increasingly complex AI / machine learning-driven algos deployed in fast-moving FX markets. 

As pre- and at-trade FX TCA offerings improve and engender greater trust in algorithmic execution tools, the sellside execution franchise operator benefits as the increased client trust in algos drives uptake (see Figure 2). GreySpark has observed that a range of sellside execution franchises view their algo offerings as competitive differentiators, and those banks dedicate significant investment budget to them. The increased uptake of these algo offerings that result from high-value pre- and at-trade TCA offerings justifies the investment in both the algos and their supporting tools.  

Trader support & Digital Investment Banking

Increased cash FX algo trading adoption by buyside liquidity consumers is a crucial component of any sellside execution franchises’ ongoing shift from a high-touch centric to a low-touch centric overall business model. GreySpark believes that this shift – if ever fully realised within the buyside community – would encompass more than just simply a change in client usage of low-touch engagement channels or the overhaul of legacy technology. Rather, wholesale digital transformation of business models requires the alteration of paradigms related to the role and practices of sellside front-office staff, including the FX sales-trader. 

Under a comprehensive digital investment banking paradigm, sellside FX traders become advisors to their clients, empowering them to use the right tools from an increasingly broad array of self-service execution and analytics services applications. In practice, this means that sellside front-office staff will often be trusted advisors to and knowledgeable resources for their clients to draw on; by enhancing a client’s capacity to execute without sellside trader intervention, front-office staff become capacity amplifiers as an ever-greater number of users engage with the full breadth of functionality available within the execution services technology stack. 


Moreover, by centring front-office staff responsibilities and client contact around human qualities and interpersonal relationships that generate trust, sellside execution franchises generate an opportunity to provide a meaningful post-trade TCA offering to the client base. In this regard, a single execution services provider of a post-trade TCA offering cannot provide value based on execution quality versus the market at-large; however, GreySpark understands that clients value insights about the quality of their execution with a given execution franchise vis-à-vis the performance of other, similar clients. 

Enhancing the Broker / Client relationship

The provision of execution-enhancing trading in combination with the presentation of broker-dealer specific post-trade TCA offerings provide sales-traders with a means to remain relevant to the client relationship even where execution will move to exclusively low low-touch channels.

Thus, the value and competitive differentiation achieved through TCA services goes well beyond narrow technical areas. Overall, GreySpark observes that the provision of appropriate and actionable TCA across the pre-, at- and post-trade spaces helps establish client trust in their execution service provider, with clients viewing sellside front-office staff as acting on the client’s behalf to ensure the best possible outcome within the bank’s framework – even where this may hurt the bank’s short-term self-interest on a trade-by-trade basis in the interests of a gradual, persistent enhancement of the business relationship over time.