The evolution of liquidity provider analytics (LPA) to support broker reviews based on quantitative performance assessment is boosting the capabilities of trading desks in the FX environment, TradeTech FX in Paris heard on Thursday.
Speaking on a panel, Daniel Chambers, head of data & analytics at BidFX, said, “TCA is a way of measuring your execution costs, and essentially tells you what has happened using a benchmark. There are ways of using TCA to help shape how you engage with the market. LPA is designed to understand why you incur costs, not just what you incurred. How did it happen? It includes context.”
Research conducted at TradeTech FX had revealed very different ways of using analytics, ranging from box ticking to support for pre-trade decision making.
“One poll at this conference asked if people use TCA to transform pre trade analytics, and the majority of people don’t, which I thought was really quite interesting,” said Joseph Forde, FX trader at Brown Brothers Harriman. “We take TCA and then LPA, so we’re looking at liquidity providers and we’re looking at what they give us, and the prices they show us. We’re trying to build a picture of various elements of the trade, how reliable they are one or more currency pairs, and then try and segment that off into buckets of trade complexity – easy, medium and difficult. We use that going forwards in a circular fashion and build that in before we trade.”
Bhavesh Trivedi, manager for dealing at retirement fund AustralianSuper noted that the transparency rules for pensions in Australia made TCA invaluable in keeping investors informed. It also allows buy-side traders to be more flexible around the liquidity providers they use, potentially improving performance.
“There has been a natural reduction of spread anyway so from a cost perspective for clients, that has been coming down, but having additional transparency coming to the market has proven this treatment, and we’ll be able to dig into fair value analysis.”
Forde added, “The important part of the LPA is the conversations with LPs afterwards. We’ve never had a bad conversation with an LP, and we’ve always seen a positive outcome when you do analysis. There’s almost an immediate change in their behaviour so it’s always beneficial. “It just helps keep those relationships in good faith, like we’ve seen [at this event] it’s a cliché, but FX is a relationship business.”
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