Uncover your hidden FX costs with Transaction Cost Analysis

Whilst you likely track your FX trades, do you have a clear picture of what they truly cost? Hidden fees and opaque charges can quietly eat into your business’ returns. Understanding and identifying your true FX execution costs is not just good practice; it's a critical component of effective financial management.

This blog will guide you through why these costs matter, the common challenges in uncovering them, and the practical steps you can take to achieve genuine transparency.

Quick insights:

• Common hidden costs include: mark-ups on spreads, slippage, and opaque pricing structures.
• Transaction Cost Analysis (TCA) offers an independent, data-driven view to uncover hidden costs and benchmark your FX execution quality.

 

Why your FX execution costs matter

For a fund manager, every basis point saved on FX execution can translate into an equivalent improvement in portfolio performance. For a corporate treasurer, reducing FX costs directly improves profit margins. These seemingly small savings on each trade can compound into significant value when measured over time.

Consider a mid-sized asset manager with USD 500 million in AUM, hedging its international equity exposure. By reducing FX execution costs by just five basis points, the firm could save around USD 250,000 annually. Similarly, a corporation importing USD 100 million worth of goods could add tens of thousands straight to its bottom line by achieving better FX rates.

In short, overlooking execution costs is like leaving money on the table - a missed opportunity to enhance returns or profitability without taking on any additional risk.

 

What makes up your FX execution cost

The FX spread - also known as the bid ask spread - is the difference between the price at which a buyer is willing to purchase a currency (the bid) and the price at which a seller is willing to sell the currency (the ask). This spread represents the core cost of trading FX and compensates liquidity providers for taking on market risk and providing pricing.

However, FX transparency remains a challenge for many fund managers and corporates. The true costs of execution are often hidden within the spread or embedded in less visible pricing structures. These hidden costs can be introduced in several ways:

• Mark ups on the FX spread
• Hidden fees in FX transaction costs
• Opaque FX pricing
• Tailored-pricing spreads
• Slippage

 

Mark ups on the FX spread

Liquidity providers often widen the bid ask spread to increase their margins, but these mark-ups are rarely disclosed. This lack of transparency means firms can unknowingly pay more than necessary for FX transactions, with the extra costs quietly adding up in the background.

FX spread example:

A business needs to exchange €5 million into USD. Their counterparty offers an exchange rate of 1.1875, while the mid-market rate at the time is 1.1865, representing a spread of 10 pips (0.0010).

At the quoted rate of 1.1875, the company receives USD 5,937,500.
At the mid-market rate of 1.1865, they would have received USD 5,932,500.

The difference of $5,000 (around €4,200) represents the hidden cost of the transaction.

This isn’t an explicit fee; no invoice will show it. Instead, it’s an implicit cost that directly affects the total amount received or paid. Across a large number of transactions, these differences can accumulate into significant sums.

 

Hidden fees in FX transaction costs

Beyond FX mark ups embedded in the FX spread, counterparties may impose administrative, processing, or settlement fees that aren’t always obvious at the point of trade. These costs can be presented as small line items, or absorbed into the final rate you see on your trade confirmation.

Such hidden fees make it difficult for businesses to calculate their true cost of execution. Even a seemingly minor charge can materially affect outcomes when multiplied across high transaction volumes or large notional amounts.

For example, some providers apply:

• Payment or settlement fees on each transaction.
• Processing or handling charges for trades executed via specific platforms or channels.
• Custody or third-party banking fees linked to underlying settlement accounts.

 

Opaque FX pricing

In over-the-counter (OTC) trading, FX spreads can vary widely due to the absence of a central exchange standardising pricing or monitoring spreads. Instead, transactions occur across a decentralised network of counterparties, allowing liquidity providers to independently set their own bid ask spreads based on their risk appetite, client relationship, and market conditions.

This structure means that FX spreads can vary widely for the same currency pair and trade size, even at the same point in time. Without transparent access to multi-bank pricing or independent benchmarks, firms may struggle to determine whether their rates are competitive or if they are quietly overpaying.

 

Tailored-pricing spreads

In FX markets, pricing is rarely one-size-fits-all, the most competitive FX rates are typically reserved for large institutions and corporations. High trading volumes can often grant the bargaining power required to negotiate tighter spreads and lower overall execution costs.

By contrast, firms with lower trading volumes often receive less favourable rates. Without the leverage that comes from consistent high value flow, these businesses face wider spreads and higher costs per trade. Over time, these higher margins can materially impact profitability, particularly for small to mid-sized corporates managing regular cross-border payments or funds executing frequent FX hedges.

 

Slippage

Slippage in the FX market occurs when a trade is executed at a price different from the one initially quoted. This typically occurs in volatile or fast moving markets, where prices fluctuate between the time an order in placed and when it is executed.

Slippage can impact traders in two ways:

• Negative slippage: When the market moves unfavourably, resulting in the trade being executed at a worse price than originally quoted (e.g. a buy order intended at 1.2000 is filled at 1.2005).
• Positive slippage: When the market moves favourably, resulting in the trade being executed at a better price than originally quoted (e.g. a buy order intended at 1.2005 is filled at 1.2000).

While both outcomes are possible, some counterparties configure their execution systems to pass only negative slippage to clients whilst retaining the benefit of positive slippage for themselves.

For instance:

• If the market moves against the client, the counterparty executes the trade at the less favourable rate, creating negative slippage for the trader.
• If the market moves in the client’s favour, the counterparty may either re-quote the price or execute the trade at the originally rate, keeping the improved price difference as additional margin.

This imbalance can have a cumulative effect, particularly for firms that execute large or frequent FX trades. To identify and manage slippage risk effectively, businesses should ensure they have transparent transaction cost analysis, including time-stamped trade data and access to independent benchmarks, making it easier to spot pricing discrepancies and ensure counterparties are executing fairly.

 

Achieving FX transparency with independent TCA

A Transaction Cost Analysis (TCA) offers a clear and unbiased view of the efficiency of your FX trades. By comparing past trades against real-time market benchmarks, TCA helps you identify hidden costs like mark-ups, spreads, and slippage that can quietly drain returns.

• Achieve full cost transparency: Gain a detailed understanding of your true FX costs, from spreads and slippage to hidden fees, across your entire portfolio and individual trades.
• Benchmark your FX costs: Compare your execution rates against the mid-market rate (MID) to ensure competitive pricing and demonstratable best execution.
• Enhance FX risk management: Analyse trade timing, sizes, and execution methods to improve liquidity access, refine strategies, and lower overall FX costs.
• Demonstrate good governance: TCA serves as an independent audit of FX execution. It verifies execution quality and costs, providing transparency that helps treasury teams demonstrate best execution to regulators and stakeholders.

Interested to see what your FX trades are really costing you? Get in touch with us for a free, independent Transaction Cost Analysis.