Transaction Cost Analysis (TCA)

 

Summary: 

• A transaction cost analysis is used by businesses to evaluate the quality of their FX execution.
• TCA’s can enhance risk management strategies and the transparency of FX costs

 

Transaction cost analysis explained:

• What is a transaction cost analysis (TCA)?
• The importance of transaction cost analysis
• How does a pre-trade TCA work?
• How does a post-trade TCA work?
• Benefits of an independent TCA over in-house
• How does a TCA differ in FX compared to equity markets?
• Transaction cost analysis providers

 

What is a transaction cost analysis (TCA)?

An FX transaction cost analysis in trading is used by businesses to evaluate the quality of their FX execution.

TCA plays a critical role in ensuring best execution and demonstrating high standards of FX execution to key stakeholders, including investors, regulatory bodies, and auditors.

Conducting a TCA allows businesses to gain valuable insights into their FX execution process, enabling them to make informed decisions, and maintaining transparency of their FX execution costs.

 

The importance of transaction cost analysis:

• Achieve transparency in FX: A TCA provides full visibility of hidden transaction costs in FX rates, for both the entire portfolio and individual trades.
• Performance management: Benchmarking FX transaction costs against the actual mid-market rate [MID], allows asset managers and corporates to evaluate the effectiveness of their FX in order to achieve best execution.
• Enhance FX risk management: Identifying risks and inefficiencies in trading enables proactive strategy refinement and risk mitigation.
• Optimise FX execution: Analysing trading times, sizes, and methods to assess the performance of an FX strategy can improve execution techniques.
• Demonstrate good governance: Serves as an ongoing audit of FX practices for key stakeholders.

 

How does a Pre-trade FX TCA work?

A pre-trade transaction cost analysis is an FX execution risk management strategy that aims to evaluate optimal execution strategy by analysing potential execution costs prior to the trade execution. It typically involved using historical data, market conditions, and trading algorithms to estimate the costs associated with different FX execution strategies.

It helps asset managers and corporates to make informed decisions by evaluating factors such as market impact, liquidity, and timing to optimise their trade execution and achieve low FX execution cost.

 

How does a post-trade FX TCA work?

For post-trade FX transaction cost analysis, the process begins with collecting a comprehensive set of accurate data regarding the transactions that have been successfully executed. This includes details of executed trades such as the transaction time, commonly referred to as the 'time stamp'.

Once this data is gathered, it is then compared against benchmark trade prices that are provided by FX transaction cost analysis service providers. By comparing the actual trade price to these benchmark prices, one can calculate the 'slippage', which is the difference between the price at which a trade is executed and the benchmark price.

The analysis of slippage can reveal various factors impacting trade performance, such as market volatility, liquidity, timing of trades and hidden transaction costs. By identifying areas where slippage occurs, asset managers and corporates can devise execution strategies to minimise costs and improve trading outcomes.

 

Benefits of an independent FX TCA over in-house

• Improved governance: Analysis follows regulatory standards and provides third-party verification of transaction costs, valuable for audits and stakeholders.
• Increased accuracy of data: Access to broader market data and benchmarks for thorough analysis, supported by robust data validation and quality control for reliable results.
• Unbiased perspective: Ensures analysis is free from internal biases and conflicts of interests.
• Save time: Allows your team to concentrate on core business activities, rather than staying up to date with the latest methodologies and industry practices.

 

How does a TCA differ in FX compared to equity markets?

TCA is more complex in FX than in equity markets as there are less transparent and available given the main FX market liquidity are concentrated in OTC markets.

In addition, fair execution prices vary considerably depending on the size of a transaction and how fast it has been executed. As a result, practitioners may use a variety of benchmarks to get a complete picture of the execution quality.

 

Transaction cost analysis providers

MillTechFX provides a free no obligation transaction cost analysis, enabling you to demonstrate best execution to key stakeholders, gain insights into how your trade data aligns with market benchmarks (mid-rate), identify opportunities to optimise your FX workflow and achieve transparence of FX execution.

Why choose MillTechFX as your Transaction Cost Analysis provider?

• Independent third-party analysis- We’ve partnered with BestX to conduct our TCAs, ensuring impartial analysis and utilising advanced analytics for FX best execution and industry-standard TCAs.
• Expert Consultation - All our TCA reports are presented by an FX specialist, providing you with the opportunity to ask questions, discuss areas for improvement, and gain a clear understanding of your FX execution quality.
• Customised Report - Get a tailored TCA report that meets your specific needs, presented in an easy-to-read PDF format for quick reference and clarity.
• Fulfil compliance obligations - We ensure our TCA services meet regulatory standards, providing detailed trade documentation and comprehensive reporting for audit trails.