At the top-left of the screen is a set of five traffic-light indicators, summarising the execution of a large spot foreign exchange trade. It’s good news – four of the lights are green, one yellow.
The rest of the dashboard explains why: a set of speedometers show how quickly the order was filled on average, along with the risk of signalling the trade to other market participants; a bar graph shows the actual and expected impact the trade had on the market; a more complex chart shows the progress of the order, with volume increasing cumulatively in the background and circles showing how execution steadily switched from passive to aggressive as minutes passed.
This is a demo, showing some of the ways clients of BestX can track the quality of their foreign exchange execution, and users say it is far richer than anything available before the firm launched in 2016.
According to Mike Harris, president of investment manager Campbell & Company, users of transaction cost analysis (TCA) software would traditionally have been able to see their performance against the standard market benchmark – the WM/Reuters forex rates – but had no way of seeing what impact their own trading had on the price, of ranking the performance of the algorithms used to fill the order, or of getting an insight into signalling risk.
“Think about the value this could add for a real-money account that historically benchmarked themselves against the WM/Reuters forex rates – these new metrics could change their approach to benchmarking and how they would ultimately improve their execution quality,” says Harris.
The market has been doing more than think about it. BestX has signed up more than 30 clients since launch – from big asset managers to liquidity providers such as BNP Paribas, Citadel Securities, HSBC and JP Morgan. In all, the firm’s buy-side clients collectively manage more than $9 trillion in assets.
They have flocked to the service, partly because regulations such as Europe’s revised Markets in Financial Instruments Directive (Mifid II) are pushing them to do a better job of looking after their end-investors, but also because low yields have made cost control more important.
We have analytics prototypes already for liquid rates markets in terms of sovereign bonds and interest rate swapsPete Eggleston, BestX
“For many asset managers, their double-digit returns have gone away, and are still to return for many of them. This means every basis point of return really matters now,” says Pete Eggleston, one of BestX’s co-founders. “Cost has become a key component – not just the overall cost of the way they are doing business, but also their transaction costs. This low-yield environment has made a lot of these institutions much more focused on saving every basis point they possibly can.”
Next year, the firm plans to bring the same kind of analytics to liquid rates products, including selected interest rate swaps and futures.
“We have analytics prototypes already for liquid rates markets in terms of sovereign bonds and interest rate swaps. The roll-out will start towards the end of the first quarter next year, and by the end of 2018 we anticipate having a fully fledged post-trade product, probably covering the G20 currencies,” says Eggleston.
The move into rates is being driven by client demand for more accurate numbers on portfolio trades, he adds – the new challenge being the market’s huge array of securities, many of which trade relatively infrequently.
But clients believe the challenge is worth facing: one says the platform has been a “game-changer” in forex, and that they are eager to see what it can do in other asset classes.
In his previous position as head of Morgan Stanley’s quant solutions and innovations team, which he started in 2010, Eggleston saw these trends emerging. While banks had built their own TCA solutions, a series of pricing scandals was undermining the industry’s credibility and boosting demand for reliable, independent analytics. And then there was the shadow of Mifid II, which at that stage was slated for implementation in 2017.
Eggleston left the bank and launched BestX along with two of his colleagues, Ollie Jerome and Aman Thind. They aimed to make BestX the standard for forex TCA, providing a level playing field with proprietary models and measures of fair value, expected cost and signalling risk that all clients would use, while being able to customise how the data was visualised.
Because BestX is independent, without affiliation to any exchange, users provide a range of data that can be used to enrich that of others. The platform also consumes data from 30 sources including Thomson Reuters, which owns a small stake in the business.
For Campbell & Company’s Harris, this “utility” positioning is the most exciting aspect of the service, because it will ultimately allow users to benchmark themselves versus their peers.
“Campbell has conducted TCA for a long time, so the process is nothing new, and while BestX has an interesting and fresh take on the way in which they output TCA results, perhaps the most interesting thing to us is the peer-to-peer analysis they will be able to provide once they develop a critical mass of clients. Seeing our performance relative to our peers is something we have never been able to do before, but something Campbell views as incredibly useful,” he says.
The week on Risk.net, December 2–8, 2017Receive this by email