The foreign exchange (FX) market is the most liquid in the world. Aside from pure dealing in currency, it is used to support equity transactions, as underlying for certain derivatives products and for hedging risk, among many other functions. The creation of the euro enhanced its profile greatly with the birth of a new super-currency, but what has altered it almost beyond recognition has been the emergence of electronic trading and the overwhelming communicative power of the internet.

The FX market has huge potential for growth but the transformation of structure and practice through technology hasn’t finished. Along with the growth in algorithmic trading, which many still consider to be in its relative infancy compared to equities, there has also been a renewed focus on transaction-cost analysis (TCA).

“Historically, TCA reporting has done a good job of characterizing inefficiencies and costs related to ‘fuzzy’ instructions and inefficient workflows,” says John Fatica, head of analytics at TradingScreen. “The demand for FX TCA is making it clear that FX executions will no longer be considered an afterthought of investment implementations. And, with the rapid increase in algorithmic execution, TCA measurement provides the feedback mechanism to refine trading tactics.”

Paolo Gilardi, head of US FX sales at TradingScreen, says that although the equities market trades a lot with algorithms, the FX market is still lagging behind, despite an exponential increase in interest. “The margins are still a bit bigger, which is why everyone, particularly on the market-making side, is interest in it,” Gilardi says. “Going forward, that’s where the value is, but it’s going to shrink quickly, and banks are looking to take advantage there.”

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Waters Technology - James Rundle - February 27, 2012