FX TCA for peer analysis

By Lee Sanders, Head of Foreign Exchange and Money Market Execution, Trading and Securities Financing Division, AXA Investment Managers.
One of the main areas which we looked at when we were changing our dealing system was the provision of transaction cost analysis. What transaction cost analysis allowed us to do was essential for us developing what we were doing in FX and how we sold that internally, and how we relayed it externally. We did a lot of work with Trading Screen to get the data that we wanted. The problem that we have at AXA is that 90 percent of our business globally is swaps, so it is very hard to put in the right information to benchmark the quality of the execution for those swaps. But that said, we worked very hard with them and a quant guy and it’s given us a credible data set which we distributed internally to the COOs and the CEO. We’re now using it to distribute to our clients, externally as well as internally; showing them the quality of the execution we’re doing. It’s also a valuable thing for us to use when we’ve outsourced FX execution to our custodian.
But, more importantly, for me, I did a number of counterparty reviews and it was a major point of discussion in those reviews; averaging out over peer groups on quality of execution. I think development-wise, there are some things which we would like to do, but in terms of more development, we have the data, but it is also about how we present that data. I think the real skill in transaction cost analysis for foreign exchange is finding more and more credible defined data that we can use for the benchmarking. I think transaction cost analysis is very advanced, if you look at the equity side which, obviously, luckily working with our Head of Trading Paul Squires I can see the high-quality results that we are able to produce. I think the other thing is being a little bit more savvy about how we execute.
If we do it electronically, obviously, making sure that the time stamp is quick and if we choose to execute by voice, making sure we book the trade quickly so that the data is credible.
I think FX TCA is developing very quickly. More people are beginning to come to the table with these offerings. And I think foreign exchange has benefited quite a lot from some of the directional change from the banks. Investment managers are looking at it more and more as well as a fully fledged business. The quality of that execution is essential. I suppose the other point will be in the light of various high profile FX execution disputes and the in-sourcing or out-sourcing of execution to custodians, there’s a quick box to be made on producing some good quality TCA.
Everybody is going to want to see whether they’re getting credible execution or not. And I think the last thing which will be developed there would almost be a peer analysis; stacking up all the banks against each other and saying “You gave us three and half bips, you gave us four and the average was two and a half. So you’re doing alright, the guy on one isn’t doing so well.” But really what we are doing is looking for massive outliers to see if someone was so far out that we have to a chat with them. But I think going forward people will want to say, “OK, well, you’re doing the analyses now of 25 investment managers.
Where do we rank like for like on euro-dollar in 10 million at mid-day,” and are we being tiered by our banks. They’re saying that they are placing us in a platinum tier, but are we in fact copper or bronze. That will be an interesting development. I think as we go down this road, a lot of the data just becomes almost consuming and more important to you because it just gives you a feel for where you sit in the marketplace.