Why SDPs should provide TCA tools for buy-side clients


The majority of single-dealer platforms (SDPs) – especially those of regional banks, provide mainly principal (rather than agency) based pricing to clients. That’s where the bank takes the other side of the trade (even if the bank covers the trades by back-to-back hedging with their liquidity providers), making their money on the spread, rather than helping the client achieve the best execution for the transaction, and charging a commission for the service.

Whilst corporate and non-financial clients will happily use SDPs, we are seeing an increasing proportion of institutional buy-side clients, those who have a fiduciary obligation to manage client money, migrating to multi-dealer platforms (MDPs). The chart below shows this migration quite clearly. It’s the Bank of England FX survey data showing the switch in FX volumes by buy-side (institutional clients) from SDPs to MDPs.

Buyside FX Flows from SDP to MDPsBank of England FX survey data showing Buy-side FX flows shifting from SDP to MDPs

The reason for the shift is not because pricing is necessarily better on the MDPs, on the contrary in many cases shopping larger trades on MDPs, can result in poorer overall fill rates. But, that’s not the point. The MDPs are preferred, because they provide the pre-trade transparency and comprehensive suite of post-trade transaction cost analysis (TCA) tools that enable institutional clients to demonstrate adherence to or achieving some form of Best Execution (BestEx), as defined by their internal execution policy.

For a while we have been blogging (here, here and here) of the need for banks to be more transparent in their pricing to clients on their SDPs. Indeed, the recommendations from the FEMR report (section 4b) call for more transparency in FX, which will feed through to SDPs.

So, the backdrop is all great timing for Andy Woolmer, CEO of New Change FX, who has just won the FXWeek e-FX initiative of the year award.

According to the website:

New Change FX (NCFX) is the world’s only independent calculator of live mid-rate reference prices for Foreign Exchange. NCFX price feeds deliver the mid-rate reference price in real time in 74 currency pairs. Our reference rates are highly accurate, highly detailed and completely independent of your bank, broker or platform.

We are not a broker, market-maker or ECN and we do not create our rates by asking you to trade with us. NCFX data cannot be manipulated or changed unlike much commonly available reference data. Our reference rates provide any FX market user with a live, independent reference rate to accurately measure execution costs. An independent rate that cannot be manipulated is always best for all parties.

If SDPs started to offer their clients TCA tools using live mid-rates from providers such as New Change, or showed the spread of their price to clients, from the independent mid-rate, it would give clients more confidence to trade on the SDP.

That doesn’t have to mean every rate needs to have zero spreads, what it means is that clients will be able see the spread the bank is making, and make a decision on whether the spread (markup) is appropriate given the size of the transaction, and then by using TCA reports over an extended period, demonstrate whether or not they have achieved what they consider to be BestEx, and whether they are getting fair pricing.

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