Transaction Cost Analysis – A microscopic analysis of the wrong thing ?

I attended a conference last week held at Bloomberg’s impressive building in the City. The subject was “TCA Best Practice” and the section on FX was very interesting. Bloomberg have a tool which, broadly speaking, allows fund managers to measure “slippage” when benchmark FX orders are executed. It can also measure, for example, how competitive are the various different quotes that a fund manager receives during this process. The information can be sliced and diced every which way and displayed graphically in glorious technicolour. Similar tools exist for Fixed Income and Equity markets. This functionality is very comprehensive, but I think there is more to the problem.

 For a domestic fund manager who is buying and selling foreign equities, the overall cost of the transaction is surely not just a few basis points of slippage on the equity transaction added to a pip or two of slippage against an FX benchmark. It seems to me that the equity fund manager has an FX exposure that arises the moment he buys or sells a foreign stock, which could have been many hours before the FX transaction is done. Perhaps the wrong thing is being measured ? Having said that, if your peers are all doing it the same way I don’t suppose there is much incentive to break ranks and do it any differently because fund management is a “relative performance” business.


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