FX cost measurement: Benchmarking trading costs
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FX cost measurement: Benchmarking trading costs

A fuller understanding of true trading costs should help decisions about post-trade functions.

According to Jeremy Smith, head of financial services at market intelligence firm McLagan (Z/Yen): "Most non-financial services industries have long-standing measurements of efficiency, from profitability in sawmills in the US to cost benchmarking for mobile phone operators in Europe. However, formal efficiency measurement in wholesale financial markets is much less developed." Smith argues in his report Cost per trade and STP benchmarking that there are several reasons for this, including the constant development of new products, and in foreign exchange, particularly, the use of multiple platforms, both internally and externally. In addition, many financial market participants have traditionally focused more on driving their businesses forward, which typically means prioritizing the front office, rather than analysing back-office metrics.

The paper was commissioned by post-trade vendor Wallstreet Systems as part of its pre-marketing for its electronic services network (ESN) service, launched in October. The reason was that Wallstreet had found that there were wide discrepancies in how people measured their post-trade costs.

"Everybody was talking apples and oranges here," says Tony White, managing director of Wallstreet. "The big guys have been involved in studies and peer assessments but once you get out of the Euromoneytop 20, some banks were adding stuff in that others were leaving out and vice-versa.

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