Joel Clark

Transaction Cost Analysis: Taking a new approach to measuring FX execution trading operations

June 2023 in Buyside Perspectives

As FX market participants deal with the evolving market structure and prepare for the implementation of MiFID II, there is growing demand for more sophisticated trade analytics to improve decision-making in real-time. Joel Clark investigates.

Advances in technology have given consumers control over their lives in ways they could scarcely have imagined a decade ago. Holidaymakers, for example, can now take virtual tours and read reviews of resorts before they book, while travellers can compare transport options online to get to their destinations more quickly and cheaply. These facilities raise the bar on performance and mean shoddy service can no longer be tolerated.

In much the same way, advances in transaction cost analysis (TCA) are shaking up the foreign exchange market and shedding light, often for the first time, on the true costs of trading currencies with particular counterparties. New sources of data and new technology providers are bringing more sophisticated analytics to the market, enabling buy-side firms to take greater control over trade execution.

“We have seen TCA evolve significantly over the past few years,” says John Cooley, head of FX buy-side trading at Thomson Reuters. “The analytical needs of buy-side firms used to be about demonstrating they had dealt on the best price among competitive quotes, but we now see demand for much more sophisticated analytics to make more informed execution decisions.”


A number of factors have driven the industry to focus on TCA.

First, the forex benchmark scandal, which was first uncovered in 2013, laid bare not only the misdemeanours of a number of individuals, but also the failure of some sellside firms to address potential conflicts of interest.

“FX is still a relationship business, and armed with strong analytic scorecards of liquidity provider performance metrics, buy-side firms can sort the best from the rest.”

Ayal Jedeikin

That in turn has put much greater pressure on buy-side traders to show that they are properly vetting and monitoring the performance and practices of their counterparties.

Meanwhile regulation is also driving firms to take greater responsibility for pursuing best execution. The European Union’s recast Markets in Financial Instruments Directive (MiFID II) requires that investment firms must take “all sufficient steps to obtain, when executing orders, the best possible result for their clients”. This raises the bar on the original MiFID rules, which required only that all “reasonable” steps be taken to obtain the best outcome.

The new definition of best execution in Article 27 of MiFID II has become something of a mantra for European firms as they advance towards the implementation of the rules in 2018. Specifically, the directive states that firms must take into account price, costs, speed, likelihood of execution and settlement, size, nature and any other consideration relevant to the execution of the order.

“The evolution of regulatory requirements in Europe is incentivising firms to create best execution policies. These often require firms to monitor the full trade lifecycle using metrics and analytics that detail the trade execution process and show the firm is obtaining optimal execution while managing risk,” says Ruben Costa-Santos, head of FX at ITG.

“MiFID II really sets a high bar for what investment firms need to do to demonstrate best execution,” adds Cooley. “To do this properly on both a pretrade and post-trade basis, firms need to take advantage of the latest advances in technology.”

Advances in TCA are shaking up the FX market


Changes in the structure of the FX market are also contributing to the drive towards more sophisticated TCA. Given balance sheet constraints, most dealers are now taking less principal risk and there is an increasing propensity to split up large orders into multiple fills.

As trade execution becomes more complex, there is a natural push from the buy side to analyse the effectiveness of execution strategies more thoroughly.

“The data that is used for TCA is absolutely critical, and if it is not completely independent of the transaction then the analysis is simply not worthwhile.”

Andy Woolmer

Meanwhile the addition of a number of new trading platforms and the decline of volume on some of the market’s incumbent trading venues has added to the fragmentation of liquidity, further underlining the need for traders to keep close tabs on the execution of their orders.

“The fragmented nature of the FX markets means participants need to save, analyse, visualise and optimise the FX liquidity they aggregate from multiple providers across fragmented liquidity pools,” says Ayal Jedeikin, co-founder and head of product at TradAir. “Hedging and risk management strategies need to be benchmarked and optimised, while banks and brokers look to better understand the trading behaviour of their clients and optimise outbound pricing.”

With the macro-economic environment remaining unpredictable, trading desks are under pressure to make each dollar count, and to avoid unnecessary waste when executing orders. Taken together, all of these factors – from the benchmark scandal and regulation to the tough trading environment – mean portfolio managers and senior management within firms may now demand clearer proof that the best possible deal was pursued and achieved.

“The buy side is very focused on achieving increased efficiencies in trading. Performance is very tight at the moment, increasing the relevance of trading costs. Across all of our clients, we see a focus on evolving FX trading practices, with TCA being used to support and validate that transition,” says Costa-Santos.


As the appetite for more sophisticated FX trade analytics has grown in recent years, banks and technology providers have sought new ways to deal with the perennial challenge of data scarcity. While TCA in equity markets may rely on trusted reference data from primary exchanges, the fragmented nature of liquidity in the FX market makes it difficult to replicate the same model.

While data can be extracted from individual trading platforms, it is difficult to legitimately use that data as the foundation of TCA as it is not an independent benchmark and can be influenced by market participants. One initiative that has proven effective in tackling this issue is New Change FX, which uses aggregated sources of real prices to provide live mid-rate benchmarks in more than 70 currency pairs.

As the New Change FX rates are derived from millions of real trading prices rather than from a single bank platform or electronic communications network, they provide an independent point against which live trades can be measured. Consumers of the data span both the buy side and the sell side and the rates can be used as the foundation for any kind of analysis or comparison of algorithms, banks, brokers and platforms.

“The data that is used for TCA is absolutely critical, and if it is not completely independent of the transaction then the analysis is simply not worthwhile. By using an independent mid-rate, banks can justify and validate their pricing in a much more clean and objective way,” explains Andy Woolmer, chief executive of New Change FX.

While the company was established in 2012, it has gathered momentum over the past year as market participants have been getting to grips with the changing market structure and preparing for the demands of MiFID II. A consultation paper on transaction cost disclosure issued by the UK Financial Conduct Authority also looks likely to require market participants to conduct TCA using mid-market prices, which would validate the New Change FX business model.

“There used to be a lot of execution efficiency analysis when we first started selling our data, but it wasn’t real TCA. It is really the changes in legislation that are driving firms towards independent data as the foundation of very tightly defined analysis of transaction costs,” says Woolmer.


The steady march towards more robust measurement of trade execution using reliable, independent data is evident in recent industry developments. In September 2016, FX startup technology provider BestX launched its new TCA service, founded on the principle of complete independence from banks, brokers and trading platforms.

The BestX service sources independent data in real-time from both Interactive Data Corporation and Thomson Reuters, and allows users to analyse the costs and execution performance of their FX transactions on a post-trade basis, with pre-trade analytics set to be delivered from the second quarter of this year.

“The analytical needs of buy-side firms used to be about demonstrating they had dealt on the best price among competitive quotes, but we now see demand for much more sophisticated analytics.”

John Cooley

While many banks have developed in-house analytics to validate the performance of their algo execution tools and electronic trading platforms, there is recognition that the stamp of approval from an independent provider like BestX is increasingly valuable. As well as a number of early adopters on the buy side, both JP Morgan and HSBC have signed with BestX to deliver TCA reports to their clients.

“Independent validation of the quality of their execution is a key tenet for the sell side as they seek to deliver transparency to the end client,” says Ollie Jerome, co-founder and director of BestX.

Under a partnership unveiled in December, BestX is using FX market data from Thomson Reuters to calibrate and power its proprietary models, while buy-side users of Thomson Reuters’ FXall and FX Trading platforms can have their trades sent automatically to BestX to generate TCA reports through a desktop integration arrangement.

As part of the agreement, Thomson Reuters has taken a minority equity stake in the company and has a representative on the BestX board. Cooley explains that while Thomson Reuters has its own TCA capabilities that it continues to develop, it recognises the benefit of partnering with independent providers that can add particular value for clients through the strength of their data or analytics.

“In addition to independent, timely analysis, buy-side firms want a process by which their trade data can be automatically analysed without additional operational and technical steps, and they also need flexibility to filter and configure the analysis as their requirements develop,” Cooley explains.

Elsewhere, other partnerships have materialised as providers look to increase the sophistication of their TCA and to better incorporate TCA into their clients’ trading process. ITG, a global financial technology company and independent analytics provider, last year integrated its FX TCA product with FX Connect, the multibank forex platform owned by State Street Global Markets. The partnership provides FX Connect clients with streamlined access to ITG’s FX analytics encompassing pre- and post-trade TCA and Global Peer group analysis. ITG analytics are provided on an independent basis using market data sourced from dealers, ECNs and the interdealer market.

“These partnerships provide clear benefits to institutional clients who want their FX platforms to capture detailed trade execution information while using an independent third-party TCA provider. The ability to obtain integrated analytics is particularly relevant as buy-side firms increasingly adopt FX TCA to handle regulatory requirements and improve trading efficiency,” says Costa-Santos.

Advanced Post-Trade software now allows market participants to analyse the costs and execution performance of their FX transactions


Next-generation TCA is not only about independent and timely analysis of spreads, however. Given the complexity of the FX market and the number of liquidity providers and trading venues, some technology providers are seeking to help participants navigate liquidity and rate market makers more accurately.

TradAir, for example, offers a comparison between how often a particular liquidity provider is at the top of an aggregated book for a currency pair with the same liquidity provider’s fill ratios. This kind of analysis means liquidity providers that offer tight spreads cannot get away with regularly rejecting trades as it will be highlighted in the analysis.

“The buy side is very focused on achieving increased efficiencies in trading. Performance is very tight at the moment, increasing the relevance of trading costs.”

Ruben Costa-Santos

“A liquidity provider may offer tight spreads and be most often at the top of the book with the best price, but if it keeps rejecting your flow, it would be better to remove that provider from the aggregation and trade with a liquidity provider that offers slightly wider spreads but has high fill ratios,” says Jedeikin.

For large orders that may have substantial market impact, buy-side firms also need to understand, on a pre-trade basis, whether their chosen counterparty will be able to internalise some of the flow.

If not, and the liquidity provider immediately starts to unwind the position in the market while the client is still executing, the liquidity provider may end up competing against its client.

Cost of rejection is another metric that is increasingly coming under the microscope as the contentious practice of ‘last look’, whereby market makers get a final chance to reject orders against a quoted price, comes under pressure on some trading venues. Increases in the frequency of price updates on primary trading venues such as EBS are already making last look less relevant, but further transparency may see it fade away altogether.

Liquidity provider XTX Markets recently announced it would make a new analysis tool available to buy-side firms to quantify the cost of rejects, and some participants suggest last look will die out as this kind of analysis becomes more widely used.

FX is still a relationship business, and armed with strong analytic scorecards of liquidity provider performance metrics, buy-side firms can sort the best from the rest. This often helps them when they engage with their liquidity providers and discuss improving the many aspects of their pricing,” says Jedeikin.