When looking at FX costs it is absolutely crucial to understand that without independent, aggregated data that reflects pricing sources without actually being a pricing source, it is impossible to measure accurately.  The reasons are manifold, but I would like to focus on two key issues:

Clearing Prices and Idiosyncratic Prices – Comparing Dealers.

The FX markets are assumed to be transparent and competitive, but this is not the case.  The FX price consists of two elements – the clearing price, and the idiosyncratic price.  The clearing price is the rate at which dealers trade with one another.  The main market-makers trade with one another at the prevailing mid-rate.  This usually means that whatever risk is taken from a client, it can be exited at the mid-rate of the market with another dealer.  The idiosyncratic rate is the rate charged over and above the clearing price to the client.  It is obvious that without having some understanding of the clearing price, the idiosyncratic price can neither be made (which is why there are few actual dealers rather than price recyclers), nor measured.  In order to protect their businesses, the dealers do not make the clearing price public.  The NCFX midrate acts as a proxy for the clearing rate and means that clients can understand their costs accurately and compare their dealers.

Sampling Errors in Data – Hidden Costs.

The second assumption is that sampling errors in FX prices are small and have no effect.  This means that clients are told that taking data from a single platform is fine, or that data that is not aggregated from multiple sources is fine because it’s all the same really.  This is not the case.  By using a midrate that is subject to sampling error (i.e. it is a narrow subset of the market) a portion of the FX costs are hidden.  We see this most often where a client is told that data is ‘independent’ because it comes from lots of providers.  Those providers are all supplying one bank or one platform that makes money from the client who trades with them.  Comparing trade costs to this narrow set means that costs are hidden.

Conclusion.

Unless your TCA data is independent, uncompromised by relationships or affiliations to specific venues, aggregated, regulated and reflective of live market conditions without being tradeable, then you are not getting a true picture of your FX costs.

NCFX is driven to create an efficient and transparent market that is fair for everybody.  We are the only provider to deliver real-time FX benchmark data that reflects the calculated midrate of the live FX markets, aggregated across many hundreds of contributions. We’re proud to be totally independent from any affiliate or trading house.

The Team at NCFX’s experience spans both buy and sell side, giving them a unique and total understanding of the FX Market.