White Paper

TCA and fair execution. The metrics that the FX industry must use.

Company: LMAX Exchange

LMAX Exchange case study

Category: Foreign Exchange

Published: 25 October 2017

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Overview

This white paper proposes the blueprint for FX TCA methodology that enables market participants to calculate and compare trading costs across both firm and last look liquidity.

Based on the analysis of data from an independent Third Party Aggregator (TPA), containing 7 million orders sent to seven LPs (both firm and last look) in 2016, the research suggests that the presently used FX TCA metrics need to be developed further to better reflect the differences between last look and firm liquidity.

This white paper examines the underlying processes of both liquidity styles and suggests the following considerations for developing an effective FX TCA methodology:

• Fill ratio is not directly comparable between last look and firm liquidity, as different processes are measured;
• Price improvement should be included in the base metrics set alongside slippage as combined price variation;
• Last look hold time, or discretionary latency, is an important hidden cost of trading that needs to be measured;
• Market impact is not usually measured, but is crucial to consider when interpreting execution quality.

In conclusion, the paper puts forward the five key metrics, Fill Ratio, Price Variation (Price Improvement/Slippage), Hold time, Bid-offer Spread, Market Impact, the traders should use to assess FX execution costs and quality across all liquidity styles. This research aims to contribute to an industry-wide debate on how to conduct FX TCA in a way that benefits the customer, provides a fair comparison for liquidity providers, and creates genuine transparency: one that enables choice and aides quality decision making.

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