Investment Technology Group Inc. is shining fresh light on the dealer-driven, over-the-counter world of foreign exchange with a new transaction cost analysis service for FX that it developed in cooperation with FXall.
The service, ITG TCA for FX, gives clients a clearer view of their dealings by evaluating FX transaction costs and through measurement of foreign exchange trades against several benchmarks.
While the foreign exchange market is the largest and most liquid securities trading market in the world, it’s also one of the most difficult to trade in because exchange rates are highly volatile and traders have no central exchange where they can buy FX data.
There is also a lack of regulatory requirements.
“It is a market that lacks transparency,” ITG Managing Director Ian Domowitz says. “We firmly believe that the growth of the securities markets generally is benefitted by transparency into people’s performance and knowledge of what’s going on. So we view this as a step in that direction.”
ITG TCA for FX aims to give clients more accurate comparisons by capturing and reporting on a portion of the true quoted and traded flow, so they don’t have to lean as much on dealers for color, or on market data vendors who might not be giving indicative rates.
The new service culls market data from FXall, conducts the analysis and reporting on its clients’ trades, and produces reports for clients.
FXall, which is a multi-bank currency trading platform, gives users access to multiple bank rates simultaneously. The data also sources time-stamped benchmark rates based on traded packages, quoted, and in some instances – indicative rates.
“I expect that the exact nature of the benchmarks will change over time as clients guide us as to what they would like to be benchmarked against,” Domowitz says.
The service might even help to prevent lawsuits like the one pitting the pension fund California Public Employees’ Retirement System, or Calpers, against Boston-based bank State Street, Domowitz adds.
Last year, the state of California filed a lawsuit against State Street, alleging it overcharged Calpers and the California State Teachers’ Retirement System by more than $56 million in FX trades. The suit came about after Calpers was reportedly told by a consultant that it had been charged uncompetitive rates on FX dealings for nearly 6 years.
ITG TCA for FX will allow buy-side traders to see where their savings are by taking mass amounts of data and organizing it by venue, counterparty, and class so they can see where their strengths and weaknesses are.
And while there have been forays into real-time TCA, FX TCA will only be available next day, although Domowitz says it expects to offer real-time service at some point.
“Part of what’s going to happen in the near-future is we will be taking this product to our clients, getting feedback … and interviewing them with respect to their need for that type of interactive capability,” Domowitz said.
For now users will receive analytics through automated email reports. They’ll also get a set of reports with analysis at different levels of granularity based on a selection of benchmark definitions, which are similar to equity TCA.
The company is targeting a wider swath of clients with the new service than the typical users of equity transaction cost analysis. While the core clients will likely include trading desks that deal in FX, Domowitz says ITG is also taking aim at investment managers at the portfolio management level, corporate traders, and treasurers.