Volatile currency markets and MiFID II are bringing the value of FX trading into focus, with corporates, investors and institutions placing more importance on cost and returns, according to the Greenwich Associates 2015 FX Survey, published in association with Thomson Reuters.

The survey found that transaction cost analysis (TCA) is becoming more widely used to determine how efficiently foreign currency transactions are being executed. However, only 8 per cent of corporates in the survey said they used this technique. It is far more used by hedge funds (42 per cent) and fund managers (29 per cent) and is more commonly used in Europe and the US (20 per cent and 27 of institutions in those respective regions use TCA).

Overall, TCA was used by a minority of large institutions in 2015 (just 17 per cent globally, according to the survey), this figure rose from 15 per cent in 2014. The graph below shows the use of TCA by region and type of institution.

Source: Greenwich Associates/Thomson Reuters

Other key findings from the survey include:

• The survey states that “However TCA is defined, the results of the analysis are only as good as the benchmark used.” But there isn't market-wide consensus on which the most suitable benchmark. Overall, corporates and banks are likely to use simpler benchmarks than hedge funds, asset managers and pension funds. The latter group are likely to use arrival price, which is based on an algorithm that determines the midpoint of the bid/ask spread when the order is submitted. Fifty-seven per cent of hedge funds use arrival price, compared to 37 per cent of corporates and just 27 per cent of banks. Other benchmarks, such as the time-weighted average price, the specific rate or limit order price, and the WM/Reuters London 4pm fix, declined in popularity. The survey report stated that: “This underscores the fact that FX investors are seeking more sophisticated ways to analyse the quality of their execution.”
• Almost half (48 per cent) of the corporates surveyed said they used a proprietary TCA tool. One-third used a third-party TCA vendor and 7 per cent used a broker-provided TCA. The survey found that, overall, the use of third-party TCA vendors increased slightly, suggesting that institutions want more independent tools and that the quality of analytics available via third-party providers is also improving. The report stated: “institutions are doing everything they can to measure and achieve best execution.”
• Corporates were using slightly fewer dealers for FX trading in 2015 – with an average of 7.6, down from an average of 7.7 the previous year.
• Almost three out of four (73 per cent) institutions said they traded electronically last year, accounting for 76 per cent of their total FX trading volume.
• The vast majority of trades in three big product categories—G10 spot outright forwards (76 per cent), FX swaps (68 per cent), and emerging-market currencies (62 per cent)—are now placed electronically, the only major exception to the rule being currency options (21 per cent).
• Multi-dealer platforms are the e-trading channel of choice, with 76 per cent of institutions that trade electronically utilizing them in 2015, while use of single-dealer platforms continued to decline.