MillTechFX is pleased to share its latest report about "The importance of Best Execution".
There is a vast amount of foreign exchange traded every day and the currency market is the largest financial market in the world. The Bank of International Settlements Tri-Annual Survey (2019) has calculated a figure of USD 6.6 trillion (that is USD 6,600,000,000,000) worth of currencies exchanged daily.
The majority of these currency transactions are made through banks whose business it is to “make a market” in foreign exchange rates and act as principal to the transaction with their customers. Depending upon the precise nature of the relationship, the pricing offered to each customer is typically tiered according to a prescribed set of criteria.
The criteria include credit worthiness, on-boarding complexities, annual FX volume traded and the type of business e.g. spot, forwards, options. Once classified, a fee is levied to each customer in the form of a spread around the mid-market price to compensate the bank for the risks involved in making a market although this often remains opaque.
There has been a focus on the quality of execution in recent years across all financial asset classes and increasingly so in the foreign exchange market as it has become apparent that excessive costs are being charged.
In many cases, “Best Execution” is not being achieved.
The Evolution of the Execution
The foreign exchange business within the banking industry is currently experiencing significant disruption as new entrants are competing with existing bank market-makers of FX rates in offering prices to retail and institutional customers.
Many different business models are being created and the disruption comes in many forms. Some have cheaper on-boarding protocols, some price credit risk more cheaply, many have user-friendly e-platforms so that customers can execute themselves. Their aim is to undercut the spreads charged by the banks and so offer lower FX transaction costs.
As a consequence, costs are falling, transparency is rising and substantial savings are on offer to all types of customer needing to buy and sell foreign exchange.
Keywords: Transaction Cost Analysis, Best Execution, Transaction Costs, tca, foreign exchange costs.