FX Lags in TCA Adoption

A London-based head of FX trading says that TCA could be beneficial in very liquid, range-bound markets, when margins are very tight. However, amid highly volatile market conditions, access to liquidity becomes a higher priority. Although his bank did not have specific TCA-type metrics to monitor traders, it had embedded these types of metrics in its high-frequency algorithmic business where margins were very tight, he adds.

According to research recently released by industry research firm Tabb Group more than a third of buy-side FX traders believe that TCA can improve the way FX trades are scheduled and routed. A survey of 137 equity trading companies, which included FX traders, found that 58 percent of buy-side FX traders attempt to measure execution quality and transaction costs.

TCA is also used by nearly 75 percent of the equity trading firms surveyed to evaluate their traders against TCA, with 25 percent of equity trading firms believing TCA should be used as part of compensation for traders.

Although Société Générale Corporate and Investment Banking (CIB) does not perform any TCA-type analysis on its voice trading business, flow data was monitored through the e-platforms it participated on, explains Lars Hakanson, global head of flow FX at Société Générale CIB in London. TCA has more value from a data collection point of view, rather than to draw conclusions on trader performance, he adds.

However, TCA could be part of the evaluation process, but opinion varies on what the sign of good execution is, depending on the size of flows the bank deals with, liquidity, and where a bank wants to capture savings, according to Hakanson.

Tabb Group found that TCA is most commonly used in equity trading, where its use among U.S. and European firms is estimated to reach 90 percent by 2009.

However, 37 percent of the 137 traders surveyed by Tabb Group believe that daily TCA could improve execution. Another 27 percent say if such data was offered they would look at it "never or infrequently." The remaining percentage was split equally between those who would examine execution quality either weekly or monthly.

The study says TCA added value by determining the cause of implicit transaction costs and help lower these costs by helping traders choose how they execute orders. However, the benefits of TCA were still contested. Nearly a quarter of those interviewed see volatility as the main driver of unavoidable transaction cost, while others cite order size and a stock's liquidity, according to the study's authors.