FX transaction costs look small… you need to turn the telescope around

The paradox of FX costs is that they look trivial, a basis points here and there. That illusion encourages some portfolio managers to ignore them. Research by Harald Hau and co-authors shows that the cost of not looking is anything but small. At NCFX we provide our clients with the tools and knowledge to ensure that they are informed and powerful, not the victims in the zero-sum game of foreign exchange. 

Don’t take our word for the fact that the dispersion of trading costs in foreign exchange is a distribution determined by sophistication and knowledge. Hau et al look at a sample of over 500,000 EURUSD FX forward trades, covering more than 10,000 clients trading with 204 dealer banks. The sample spans “sophisticated” investors through to small and medium-sized non-financial corporates. Their findings are stark. 

Source: Price discrimination in OTC Markets – Hau, Hoffman, Langfield, Timmer 2019

The chart above plots realised transaction costs against client sophistication. Each dot represents an actual trade outcome. The solid line is a kernel-smoothed estimate of the expected transaction cost for a given class of client. 

For low-sophistication participants, the kernel-smoothed estimate of expected transaction cost is around 20 basis points. For sophisticated clients, it is a small fraction of that. In the most liquid FX market in the world, some participants pay more than ten times what others pay for the same risk transfer in the world’s most liquid asset, EURUSD. Imagine the dispersion we see in less liquid currency pairs.  

The dispersion around the smoothed kernel line shows that there are winners and losers in every sophistication group and the reward for becoming more sophisticated and better informed is significant. High costs are not inevitable whoever you are. Paying over the odds is the result of weak price discovery, limited counterparty comparison, and a lack of scrutiny. In other words, search and attention matter. 

Anyone with responsibility for foreign exchange implementation has a fiduciary duty to minimise those costs. FX execution costs compound silently across portfolios, mandates, and years and everyone in finance should understand the power of compounding. At 20 basis points, costs approach $2,000 per million traded. At competitive levels, they are closer to $200. The difference of poor governance can be the difference between success and failure. Best execution in FX requires measurement, transparency, and accountability and that isn’t possible without accurate and independent transaction cost analysis (TCA). 

Use Case: Large Asset Manager, FX Forward & Swap Cost Optimisation 

Working with a large asset manager, New Change FX applied its Transaction Cost Analysis (TCA) framework to examine FX forward roll activity at a granular level. While headline execution costs appeared competitive, deeper analysis across specific tenor buckets revealed meaningful dispersion in realised outcomes. Only NCFX has the necessarily granular data to measure true costs in forwards. By introducing flexibility in roll-date selection within defined tenors, the client identified potential savings of 0.30 basis points, equivalent for them to approximately USD 1.2 million in annualised cost reduction. 

The outcome reinforces a central finding of the research above: even among highly sophisticated participants, execution costs vary materially and having the right information matters. Measurable savings emerge when execution outcomes are systematically examined, compared, and governed, rather than assumed to be efficient by default. 

What New Change FX TCA Delivers 

New Change FX’s TCA solution provides independent, trade-level analysis across FX spot, forwards, and swaps, enabling clients to benchmark execution quality, identify outliers, and evidence best execution across dealers, platforms, and custodians. With highly granular pricing data, particularly in less transparent instruments such as FX swaps, clients gain the ability to move beyond averages, understand dispersion, and systematically improve execution outcomes over time. 

If you don’t measure FX execution, you can’t govern it. Learn more about how New Change FX TCA can uncover your hidden costs, even in the most sophisticated trading environments. For more information, contact us at info@newchangefx.com