Transaction Cost Analysis (TCA)

 

Summary: 

• Transaction Cost Analysis (TCA) is a tool used by businesses to evaluate the quality of their FX execution.
• FX transaction costs, also known as foreign exchange transaction costs, are the fees and expenses incurred when buying or selling currencies in the foreign exchange market. These costs can include bid-ask spreads, commissions, and conversion fees.

 

Transaction Cost Analysis explained:

• What is a Transaction Cost Analysis (TCA)?
• Key aspects of Transaction Cost Analysis
• How does a pre-trade TCA work?
• How does a post-trade TCA work?
• Benefits of an independent TCA over in-house
• How does a TCA differ in FX compared to equity markets?
• Transaction Cost Analysis providers

 

What is a Transaction Cost Analysis (TCA)?

Transaction Cost Analysis (TCA) is a tool used by investors and businesses to assess the effectiveness and quality of their foreign exchange (FX) execution in trading.

TCA plays a critical role in ensuring best execution and demonstrating high standards of FX execution to key stakeholders, including investors, regulatory bodies, and auditors.

Conducting a TCA allows businesses to gain valuable insights into their FX execution process, enabling them to make informed decisions, and maintaining transparency of their FX execution costs.

 

Key aspects of Transaction Cost Analysis

• Achieve cost transparency: A TCA provides full visibility of hidden transaction costs in FX rates, for both the entire portfolio and individual trades.
• Benchmarking FX costs: FX transaction costs can vary significantly. By benchmarking these costs against the mid-market rate (MID), asset managers and corporates can evaluate the efficiency of their FX strategies and ensure optimal execution.
• Enhance FX risk management: By identifying risks and inefficiencies in trading, businesses can proactively refine their strategies and mitigate potential risks.
• Optimise trading strategies: Analysing trading times, sizes, and methods helps assess the performance of an FX strategy, leading to improved execution techniques.
• Demonstrate good governance: Acts as an ongoing audit of FX practices, providing transparency and accountability for key stakeholders. 

 

How does a Pre-trade FX TCA work?

A pre-trade Transaction Cost Analysis (TCA) is an FX execution risk management strategy designed to evaluate optimal execution strategies by analysing potential costs before executing a trade. It typically involves using historical data, market conditions, and trading algorithms to estimate the costs associated with various FX execution approaches.

This analysis helps asset managers and corporates make informed decisions by assessing factors such as market impact, liquidity, and timing, ultimately optimising trade execution to minimise FX costs. For example, a TCA might reveal that trades executed during certain hours experience higher market impact and wider spreads, leading to increased costs. By adjusting the timing of trades to less volatile periods, businesses can significantly reduce costs and enhance overall execution efficiency.

 

How does a post-trade FX TCA work?

For post-trade FX Transaction Cost Analysis, the process begins with collecting a comprehensive set of accurate data regarding the transactions that have been successfully executed. This includes details of executed trades such as the transaction time, commonly referred to as the 'time stamp'.

Once this data is gathered, it is then compared against benchmark trade prices that are provided by FX Transaction Cost Analysis service providers. By comparing the actual trade price to these benchmark prices, one can calculate the 'slippage', which is the difference between the price at which a trade is executed and the benchmark price.

Analysing slippage can uncover factors affecting trade performance, for example, market volatility, liquidity, trade timing, and hidden transaction costs. By identifying areas where slippage occurs, asset managers and corporates can devise execution strategies to minimise costs and improve trading outcomes.

 

Benefits of an independent FX TCA over in-house

• Improved governance: Analysis follows regulatory standards and provides third-party verification of transaction costs, valuable for audits and stakeholders.
• Increased accuracy of data: Access to broader market data and benchmarks for thorough analysis, supported by robust data validation and quality control for reliable results.
• Unbiased perspective: Ensures analysis is free from internal biases and conflicts of interests.
• Save time: Allows your team to concentrate on core business activities, rather than staying up to date with the latest methodologies and industry practices.

 

How does a TCA differ in FX compared to equity markets?

TCA is more complex in FX than in equity markets as data is less transparent and available given the main FX market liquidity are concentrated in OTC markets.

In addition, fair execution prices vary considerably depending on the size of a transaction and how fast it has been executed. As a result, practitioners may use a variety of benchmarks to get a complete picture of the execution quality.

 

Transaction Cost Analysis providers

MillTech’s free, no-obligation Transaction Cost Analysis tool allows investors and businesses to demonstrate best execution to key stakeholders, gain insights into how trade data compares with market benchmarks (mid-rate), identify opportunities to optimise your FX workflow, and achieve greater transparency in FX execution.

Why choose MillTech as your Transaction Cost Analysis provider?

• Independent third-party analysis- We’ve partnered with BestX to conduct our TCAs, ensuring impartial analysis and utilising advanced analytics for FX best execution and industry-standard TCAs.
• Expert Consultation - All our TCA reports are presented by an FX specialist, providing you with the opportunity to ask questions, discuss areas for improvement, and gain a clear understanding of your FX execution quality.
• Customised Report - Get a tailored TCA report that meets your specific needs, presented in an easy-to-read PDF format for quick reference and clarity.
• Fulfil compliance obligations - We ensure our TCA services meet regulatory standards, providing detailed trade documentation and comprehensive reporting for audit trails.