FX TRADE EXECUTION
have increased the demands placed on market participants to demonstrate that they have put in place fair and transparent FX trading practices. MIFID mandated that firms demonstrate that they provide best execution when trading equities. Under MIFID II, that was
extended to all
asset classes, including FX.
To an outsider, these
changes can
seem subtle: the new rules require market participants to take “all sufficient steps” rather than “all reasonable steps” to get the best possible results when executing trades on behalf of clients. But this subtle change in wording calls for a step-change in the level of sophistication expected from market participants when it comes to demonstrating that they have achieved best execution.
other OTC markets have lagged behind exchange-traded markets in TCA. In part, this may be driven by the fact that FX exposures are often generated by cross-border
Measuring “Best Execution”
Other dimensions of best execution can also be hard to measure, particularly in those OTC markets where thinner
results in less data. To
must also consider market price
performance, – where
– algos
prove best execution, trade
comprehensively analysis impact,
benchmark and are
being used to execute trades
To comprehensively prove best
execution, trade analysis must also consider market impact, price benchmark performance, and potential information leakage
investments in equities or bonds. But it is also a direct result of access
to market data which is
Transaction Cost Analysis (TCA) is one of the steps that MIFID II now compels market participants to undertake when proving best execution. Historically, FX and
38 FX TRADER MAGAZINE April - June 2019
comparatively scarce. In less liquid markets, finding a price and demonstrating best execution is a constant challenge. The data are sparse and historical data can quickly lose relevance as market conditions evolve.
information leakage. Indeed,
proliferation
the of
algorithmic execution adds a new dimension to the expectations being put on sell- side firms to analyse their
execution
phenomenon of f lash in
financial markets
performance. The comparatively new crashes
- most
infamously the May 6, 2010 event, which caused a 9% price drop, and then quickly recovered most of the losses, all in just 30 minutes - has been attributed by many regulators and practitioners to the unintended consequences
of high-frequency algos interacting with one another. potential
liquidity
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