Various products and services designed to reduce post-trade costs have been introduced in recent years – most recently in September, when Bloomberg and Traiana announced a joint solution for FX options processing.
While transaction-cost-analysis software tools and best-execution reports provided by either brokers or exchange platforms have closed the gap on execution costs, the extent to which that differential can be eliminated depends on the availability of an independent mid-point or reference price, explains GreySpark Partners senior consultant Russell Dinnage.
“For buy-side firms trading spot FX and various FX derivatives, obtaining a reference price from a broker-dealer, a broker or a brokerage/exchange platform that buyers of the instruments largely trust as being independent and accurate is relatively straightforward because of the existence of large retail markets for the cash products,” he says.
|
Russell Dinnage, |
However, Dinnage suggests until there are stronger retail markets for asset classes containing products and instruments for which pricing remains inherently non-transparent, closing the gap on execution costs for the buy side will continue to be a process of avoiding worst execution as opposed to striving to achieve best execution.
Andy Woolmer, managing director of New Change FX, reckons the growth of direct market access and liquidity market-making solutions for passive clients will reduce post-trade costs.
“Switching to a prime-broker model with direct market access and built-in transaction cost analysis ensures all costs become transparent,” he says.
“For example, a client might achieve a passive execution cost of minus $20 per million versus mid – essentially a win versus mid created by passive market-making technology; a direct market access cost of $20 per million; a clearing cost with the custodian of $20 per million; and a credit provision cost of $10 per million. This comes to substantially less than the bundled solution in which no costs are broken out.”
Woolmer says recent developments in prime brokerage have pushed up costs, but also acknowledges that the requirement under Mifid II to achieve best execution will change this situation as asset managers will be obliged to ensure clients are getting the best possible rates throughout the trade cycle.
“Most passive FX clients currently have execution costs between $250 and over $1,000 per million traded, including non-transparent post-trade clearing costs,” he adds.
|
Jerry Norton, CGI |
Jerry Norton, vice-president, financial services at CGI, suggests the market needs a more radical approach, such as moving to post-trade “utilities” supported by standard technology components.
He says this approach could reduce costs by more than 30% and weight charges for manual or exception trades to encourage good behaviour in the form of submission of clean trades which can go straight through.
In November, Peter Randall, COO of permissioned-ledger system developer SETL told Euromoney his company plans to use blockchain technology for post-trade payments and settlements.
“Risk analysis and processing steps are also a challenge,” continues Norton. “The radical move here might be to use blockchain, which could link the settlement with the payment and create a payments-versus-payment or a delivery-versus-payment model offering the prospect of a real step-change in cost.”
According to Jill Sigelbaum, global head of FX at Traiana, one of the reasons why post trade is expensive in FX is that there are too many providers, each specializing in a single client sector and some linked to facilitating execution.
|
Jill Sigelbaum, Traiana |
“Each solution addresses the requirements of one workflow or set of functionality, rather than one provider supporting all client sectors,” she says.
Sigelbaum refers to Traiana’s NetLink as an example of a service that has substantially reduced execution costs, adding: “By not equating the individual trades with high processing costs, it allows the banks to price aggressively and be profitable.”
Dinnage observes that MahiFX is developing a solution that is capable of pricing a spot FX trade at the correct delta between the bid price and the mid-rate so counterparties can achieve the highest likelihood of execution without crossing the spread.
“Herein, the necessity of provisioning post-trade services as part of the package of PaaS [platform as a service] products is largely negated by the fact that the solutions are designed to ensure the best possible level of execution in the pre- or real-time phase of trading as opposed to proving after the fact that barriers to best execution such as last look or general levels of natural price slippage were avoided,” he concludes.
