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The biggest problem with understanding the cost of foreign exchange trading is the lack of independent data.

In a very fragmented forex market it can be hard to identify what a fair mid-price looks like. The mid price quoted by a broker is only going to be that particular broker’s mid price.

“There’s a circular element in foreign exchange which is deeply problematic when you are a customer,” explains Andy Woolmer, CEO at New Change FX.

His firm now produces a live feed in 72 traded currency pairs in the spot market which represents the world’s only live spot market. It provides traders with the only current independent measure of the mid of the market which they can use to measure the overall cost of their forex transactions.

In the case of the New Change FX rate, it cannot be traded and is not affected by the execution of a given trader, fund or bank. It is a way to measure the system from outside the system.

New Change compares an execution price and time stamp to the independent price and time stamp price and from that assessing in simple dollar terms what has been paid.

“The schoolboy error comes from looking at foreign exchange as a question of spread, rather than as a question of spread and skew,” explains Woolmer.

Many investors ignore the costs of forex

Many traders and investors will ignore the inherent costs involved in their trading and investing. Ultimately, the forex market is not as efficient and liquid when it comes to the actual cost of transactions. Higher volume investors and fund managers can quickly find themselves racking up considerable costs this way.

Trading systems can cloak costs because data and the trading originates from the same place – e.g. transaction data being generated by investors can also be the source of the data used to analyze the costs in the first place.

Data aggregation from multiple sources can produce a benchmark that can be used as that central cost reference point.

Woolmer’s advice is to make sure you are measuring your forex costs – it does not require enormous time and effort but can quickly reveal who the brokers are best suited to your forex needs, who to deal with in the specific currencies you might need to trade or hedge in – this sort of research will make you trading more efficient.

Ultimately, a neutral rate against which to make comparisons will give the trade more insight into the costs of his day to day activity. Buy from the supplier that is best for you.

Armchair takeaways:

  • A lack of independent data combined with a highly fragmented market makes it harder to source accurate data against which forex costs can be measured.
  • By aggregating multiple sources of data, New Change FX can build a more accurate mid price feed that fund managers and other traders can use to assess their foreign exchange costs.
  • Many fund managers and investors remain oblivious about the forex costs they are unwittingly shouldering.

 

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Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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