Tag Archive for Fund Manager

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.

 

FX investigations – where next ?

News that FX traders may have shared information about order flow with large customers is not really news. However, there is a significant difference between sharing information about order flow BEFORE the deal takes place, and reporting it in generic non-specific terms, AFTER it has occurred.

The focus of the investigations is going to shift in 2015, as compliance teams and the various authorities realise that the actions of the FX traders with regard to fixing deals, are just the tip of the massive iceberg that is the foreign exchange market. There are still a number of unanswered questions :

Why do Fund Managers continue to allow their FX business to be done at “benchmark” prices that they KNOW are sub-optimal? When will pension fund holders start to question whether the Fund Managers have fulfilled their fiduciary duties concerning “best execution” ? How do major bank Salespeople differentiate themselves from their competitors in order to “win” business ?

Although we have seen a welcome pick-up in market volatility over the last few months, this might be a year of fears over what will be revealed by the next phase of investigations, and this may continue to cast a shadow over the FX market in 2015.