Balance and compromise within the Best Execution process

Best execution as a concept continues to be the subject of much debate across the industry, with both liquidity providers and takers, and asset owners, having different opinions and definitions.

This is no surprise given the relatively amorphous nature of the subject, it really does just depend on what you are trying to achieve, how you are trying to achieve it and why.

Best execution means very different things to different types of market participants. For example, a passive index manager will typically have a best ex policy that differs considerably to that of a pure alpha driven macro hedge fund, or a corporate treasury. Clearly, it is not possible to define a ‘one size fits all’ definition for such a broad spectrum of market participants, and therefore any technology solution needs to be flexible and configurable.

BestX launches post-trade TCA for equities

BestX, State Street’s foreign exchange and fixed income best execution analytics platform, has expanded its execution analytics software and launched a post-trade transaction cost analysis (TCA) module for equity markets.

Covering global stock markets, the new functionality provides clients with benefits of the unique BestX web interface alongside flexible data analysis, report configuration and generation.

“We responded to our clients’ needs by expanding BestX to provide a full multi-asset class offering,” says Pete Eggleston, BestX Co-Founder. “Whilst launching fixed income at the end of 2018, it quickly became clear that clients wanted one application to analyse all of their trading. The desire to consolidate data and vendors is a trend that we anticipate will accelerate over the next few years and we needed to ensure we were positioned appropriately for this.”

Choppy markets revive quest for RFQ’s ‘magic number’

Deutsche argues for smaller, stronger panels; Citi offers better prices for 'full amount' trades.

According to De La Soul’s 1990 hip-hop smash, the magic number was three – “no more, no less”, the group insisted.

Volatile FX markets reveal pitfalls of RFQ

Clients urged to mask trading intent; critics warn of subtle sell-side advantages.

Dealers are urging clients not to give too much information away when requesting foreign exchange prices, after the tactic backfired in virus-hit markets.

When obtaining a two-way price for a particular currency pair, some clients have been choosing to indicate which currency they are buying. The aim is to secure better liquidity but the result in volatile trading has been to move the price, making it more expensive to execute follow-on trades.

In choppy FX markets, algos buck expectations

Goldman, Nomura and others report increased volumes, although some clients revert to principal quotes.

Algorithmic execution of spot foreign exchange has increased as the spreading coronavirus has roiled markets in recent weeks – a surprise considering algo usage was widely tipped to decline in choppier trading conditions.

“We’ve seen an enormous pick-up in the use of algos in recent weeks,” says Ralf Donner, head of fixed income, currencies and commodities execution solutions at Goldman Sachs. He puts the increase at around 50%.

Algos: choosing the right horse for the right course

Liquidity and volatility regimes play big role in performance, BestX quants show.

In the world of foreign exchange algorithms, received wisdom is that aggressive strategies are fast, but have more market impact and hence cost more, and passive strategies are the opposite.

But, of course, it’s not that simple. According to BestX research, depending on the combination of volatility and liquidity regimes, choosing the right horse for the right course can result in drastic differences in performance.

FX Algo News - The role of pre-trade analysis in FX algo selection

Best execution is not simply about measuring transaction costs, and other relevant metrics, after a trade has been executed. Best execution is a process, whereby informed decisions are made throughout a trade’s lifecycle, pre- and post-trade, in order to achieve the best possible result for the client.

The modern foreign exchange market is a complex beast, providing participants with many different methods of execution. Within each execution method, there are a multitude of factors, and therefore additional decisions, to consider. For example, if you are employing a request for quote (RFQ), how many liquidity providers should you request quotes from and which ones? Or, if you are considering algorithmic execution, how do you select from the extensive range of products now available, and when a specific product is chosen, how should you select the parameters to use? In addition, do you want to access the market directly and have your liquidity provider place orders on your behalf, or do you want to simply execute with a counterparty as principal? If the former, are there specific venues you would like to access? The decision-making process can clearly become quite complex pretty quickly.

Independent TCA still a challenge in FX market

Implementation of FX transaction cost analysis (TCA) appears to have stalled, with the impracticality of conducting analysis across every available venue encouraging many parties to rely on venues or dealers to measure execution, despite concerns over transparency and impartiality.

During a presentation on FX market fragmentation at TradeTech FX 2019 in September, Andrew Hauser, executive director for markets at the Bank of England (BoE), spoke of the merits of responding to the challenge of greater fragmentation by seeking more effective, robust and independent aggregation, analytical and execution tools.

One of the observations he made was that TCA data sourced exclusively from one liquidity provider are unlikely to provide an objective evaluation.

Redefining FX Best Execution with Data Intelligence

Unlocking the insights from vast volumes of currency (FX) market data has long been the aim of skilled traders. Unlike equity market data, the over-the-counter (OTC) nature of FX trading means there is very little data standardization. With the new FX transaction cost analysis (TCA) tool built by BestX®, non-standardized data is normalized and presented back to traders in a way that is easily analyzed and acted upon.

Tomo Tokuyama, head of trading at First Quadrant, a large systematic alternatives manager in Los Angeles, California, has deep experience in currency markets, both on the sell side and the buy side, and has witnessed first-hand how technology has transformed FX trading. Lou Maiuri, State Street’s Chief Operating Officer, recently sat down with Tomo to discuss that evolution and how the BestX® TCA tool has taken execution to a new level with data intelligence that is helping traders better architect and deploy FX strategies in a more targeted and cost-efficient way.

Funds Europe Sibos preview: What’s happening at Sibos this year?

Experts from asset servicing, technology and post-trade services speak to Funds Europe about issues likely to emerge at the Sibos post-trade conference, held in London from 23-26 September. Among them Pete Eggleston, Director, BestX (State Street):

What is the asset management industry doing to fine-tune trading data and improve transaction cost analysis?

“The use of data to help improve the execution process within the FX market has increased significantly in recent years. There are multiple use cases, covering all aspects of the trade lifecycle from pre-trade, through the execution itself – in terms of helping traders make more informed decisions – and post-trade analysis. Decision-makers can be deluged with too much data, especially if it is not delivered in an easily digested and intuitive format. The topic is evolving rapidly, not simply around ‘big data’ but how to turn this into actionable ‘smart data’.

Key to helping the industry with this challenge is to deliver rigorous analytics, packaged and summarised in an intuitive, interactive and visual web-based user interface. The software is designed to allow a fund manager to codify their best execution policy, specifying the execution factors that are relevant for their business and execution style, together with user-defined, systematic outlier detection and monitoring. In State Street’s latest product upgrade, a new Peer Analysis module was included for the buy-side, which allows clients to opt in and share their performance data in an anonymous, community data pool, providing the basis for relative comparisons of performance against their peers.

The foreign exchange and fixed income best-execution analytics platform is used extensively by liquidity providers and effectively delivers a utility to the industry (i.e. a level playing field comprised of a common language of methodology and metrics). This provides the market with a standardised platform – a key challenge in any over-the-counter market – enabling meaningful and positive interactions between liquidity takers and providers.”

TCA data on FX algo performance winning over the buy-side

Transaction cost analysis (TCA) data on the performance of algorithms in foreign exchange (FX) is proving a hit with the buy-side.

Speaking at TradeTech FX Europe in Barcelona, a panel of FX market participants agreed that the use of algorithms will likely increase. However, uptake has been slow on the buy-side despite the market moving towards an equities style through more automation.

State Street Acquires BestX

State Street has acquired BestX, a software company that provides independent trade technology and TCA analytics.

The financial terms of the deal, which is expected to close in Q3 subject to closing conditions and regulatory approval, are not being disclosed. Following the deal, BestX will sit within State Street’s Global Link product suite, which is run by Martine Bond, executive vice president and head of trading and clearing for State Street Global Markets.

“Over the past few years, Mifid II, combined with broader economic and political stresses in the market and great competition in the FX market, has meant that our clients are looking for greater transparency and ways to improve their performance and their returns to client and shareholders,” says Bond. “So we started to look at strategic partners that could really help us achieve those goals for our clients and that’s why in January this year we partnered with BestX to offer TCA solutions. We had an overwhelmingly positive response from both the buy side and sell side and it became obvious to us that the BestX team were very strategic in the way that they thought and understood that this isn’t just about post-trade TCA, there’s so much more that we can offer clients. So I think that this acquisition is really the formalisation of that partnership, which we want to take to the next stage and I think that our clients are going to be delighted with the direction that we’re taking.”