Best execution and TCA

Christian Schoeppe
Head of FX trading EMEA
Deutsche Asset Management

“TCA supports achieving the best overall result of trading - which does not only consist of the best price though. For example it’s no use having one counterparty at the top of the pricing list if the same one fails in every second trade matching, or for example provides no market colour/research to us. Liquidity analysis is key for point-in-time or automated execution which continue to play a major part of the daily basket of modern buy-side FX traders adapting to change and enhancing their trading style – they must understand how our liquidity providers handle our orders and confirm their intention for best execution.”
“Our biggest duty in the FX industry is to strive for more transparency and the infrastructure needed to keep up with the growing volumes of data. We have to elaborate best execution across the whole firm, and therefore not just performing internal TCA but also evaluating what specialized providers can offer including multiple benchmarking.
The challenge remains that FX is an overthe-counter product and no official mid-market reference point currently exists. But we are getting there with the right mix of indicative and tradeable reference prices which both have their value in existence.”

Achim Walde

Senior FX risk manager/currency overlay Metzler

“Best execution is a must, but not everybody agrees what it means. If I ask three brokers for a price and take the cheapest one, I could say that’s best execution.
But that’s too simple. To really offer best execution it’s not enough to only offer the best price right now in this moment, you also have to offer best price execution over longer time periods, such as the whole day or a whole week.”
“A permanent TCA is a necessity for FX and it should be part of best execution. The challenge now is data.
Increasing the quality of TCA would involve seeing not only the price but also volume, which is nearly impossible. When you look at equities you can see volume and price, but not FX right now. Because it is OTC, I don’t know if it is possible. But I would like to see it."

Regulation

Christian Schoeppe
Head of FX trading EMEA
Deutsche Asset Management

“We face regulatory adverse impacts on liquidity and fragmentation, on the other hand it’s been major central bank policy diversion that contributed to higher volatility since last year.
Therefore modernising best execution concepts has been a focus theme in the asset management industry: how can we
get the best result from liquidity providers for our investors?”
“This era of market structure changes continuously leads to electronic routes taking major shares of FX trading, meaning systematic data access and handling has become increasingly important for asset managers in the light
of MiFID II regulations.
Technology continues to be the most important factor in this electronic migration: leveraging an EMS/OMS suite for the asset class FX to become most efficiently traded is key.”

“The buy-side should be looking now at improving the tools it is using to ensure it is ahead of the curve with regards to market regulation and accountability.
The near future is likely to include further attempts to regulate market activity, with a spotlight on FX.
Accusations of rigged markets, various scandals and numerous lawsuits have pushed clients to allocate resources to monitor the realisation of best execution.
Monitoring and evidencing best execution becomes more crucial as the markets become more highly regulated.”

Daniel Chambers

Head of trading
Sequoia Capital Fund Management

Relationships and technology

“One key aspect involves active counterparty management and enhanced communication: our traders need to continuously assess and monitor what areas of the business liquidity providers are committed to, which impacts how and where our business is executed.”

Christian Schoeppe
Head of FX trading EMEA
Deutsche Asset Management

Achim Walde

Senior FX risk manager/currency overlay Metzler

“People running trading books and taking risk on it is what is needed, and a platform doesn’t do that directly.
I don’t see what they add. We don’t need more infrastructure, ultimately we need someone with a trading book.We don’t use algos because we don’t understand it. If you don’t understand something, you shouldn’t be using it, but we use our own quantitative models incorporated in our currency overlay management.”
“Sitting the traders next to each other is not true multiasset
trading – it’s cost cutting. Multi-asset desks are not being created because it’s a better way to trade. It’s just cost cutting. If you want to trade well, you should have a specialised FX trading desk.”
“Don’t do it. Don’t use a custodian for FX trades. If nobody wants to trade FX, then outsource it to another asset manager, but don’t use a custodian. They’re not an expert in FX. It’s a complete no-go.”

“The decision to execute entirely through electronic trading was a natural one to make as it is in keeping with SCFM’s ethos of implementing technology to increase productivity. SCFM has always traded electronically, with varying degrees of complexity.
Reduced likelihood of errors during execution and increased efficiency were two of the key drivers for this decision and has proved to be the correct decision. The post-trade TCA and liquidity analysis are carried out using tools built in-house.”
“Using in-house tools provides flexibility that enables you to look at things from different perspectives and make changes in the way you view your costs etc. Third-party software that I’ve seen does add value and include numerous features that may not be available immediately when building tools from scratch in-house, but my opinion would still be that gaining insight to then replicate and create a more bespoke version, is a good approach to take.”

Daniel Chambers

Head of trading
Sequoia Capital Fund Management

K&K Global Consulting Ltd

Nicholson House, Office 7

41 Thames Street

Weybridge

Surrey

KT13 8JG, UK