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Combining FX data and analysis gives asset managers insight to preserve alpha
Everyone now knows the value of “big data.” However, as with everything that is perceived to have some value, owners have quickly become protective. Some FX platforms are disrupting this trend, realising that the power of data collection from varied sources can enhance the decision-making process and Alpha opportunities for both buy- and sell-side clients.
A sophisticated FX platform makes life easier for clients by taking over the burden of data collection and analytics production. And it can do so for a lot less because of development and maintenance costs being shared across the entire user base, rather than financed by a single, independent provider. But data alone isn’t the answer unless clients have the capability to distil and decipher it for their own benefit.
Although FinTech firms are popping up with regularity to offer some part of the solution, the few that can provide a combination of both data and analysis look set to be victorious. Instead of just big data, the key differentiator to controlling execution costs and preserving Alpha is being able to apply attribution to that data. It’s not just about what you spent, but about knowing where you spent it.
Transaction cost analysis becomes every cost analysis
So, what has changed? The early demand from buy-side clients focused on cost control, with the emergence of Transaction Cost Analysis (TCA) providing a benchmark for trading costs that primarily ticked the regulatory due diligence box.
Liquidity providers can benchmark their own performance versus the market
Streaming NDFs boost liquidity and aid automation
Even today, hardly any platforms can provide a decent body of reliable data—other than a basic screenshot of the liquidity at the time of execution—from which to derive an accurate Transaction Cost Analysis.
With the FX market boasting turnover of $8.7 trillion a day, based on the latest Bank of International Settlements (BIS) survey, even a trajectory to just 10% of that total would be a substantial increase in volume. Future entrants to streaming NDF pricing and data may discover that late is too late, and their more nimble and sophisticated competitors have already captured the lion’s share of the market, pushing the barrier to entry ever higher for the newcomers.
Data analysis will be able to highlight the effectiveness of policy decisions
Another advance that’s just around the corner is the introduction of a so-called Verdict system. Clients soon will be able to place a set of parameters on their trades to ensure every transaction meets their internal due diligence criteria. Clients will be able to determine their own priority of factors such as spread and speed of execution to adhere to their internal cost controls and receive a warning when one or more aspect is outside of those boundaries. Ascertaining this information before executing the trade is far more valuable than a post-mortem on where things went wrong.
Sitting in the middle is the best of both worlds
The use of data has already become an essential part of FX trading and its importance will only grow with time. While many FinTech companies offer data as a service, it is very much on the Costco model of “more is better,” yet still only a restricted cross-section from the time of execution. In addition, many providers are more reliant on the sell-side that provides the liquidity, rather than the buy-side that needs it, so much of their data goes back to the people that provided it.
This article first appeared on e-Forex. TabbForum.