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It is very difficult to properly evaluate foreign exchange costs if you are a trader – this is because of the very nature of the FX market.

Brokers receive their prices from one of a number of banks active in the FX market, as there is no central exchange to underpin forex. The best many fund managers or traders can usually do is try to compare quotes from different brokers. At the broker level, trading desks are often stuck with comparing streaming quotes from large banks and calculating the prices of CFDs based on those. I used to spend time doing this at CMC Markets.

How can you properly benchmark forex transactions?

Help is at hand in the form of a forex benchmark from New Change FX (NCFX), a UK-based fintech set up to provide the world’s first proper benchmark on 72 currency pairs for spot and 38 pairs for forwards. The data is aggregated directly from ECN layers and produced as a md-rate feed or via FiX API. The head of quant analytics at a very large asset manager recently described it as “the best data on the street.”

The NCFX data is not available for trading. Its real utility comes from its ability to help traders and brokers achieve more transparency in the market and to diminish search costs. In an OTC market, forex prices are a reflection of the market clearing rate, plus a mark up which produces what NCFX calls “a customised idiosyncratic price that the client sees.”

A forex benchmark is there to help identify what the clearing rate is, or the real cost of the trade. When a client transacts with a forex broker, the broker must obtain inventory from the market to fill the transaction, thereby altering their own mid-rate. Any analysis performed on the adjusted mid-rate hides the broker’s own market impact cost.

The broker’s own activity has created what is called skew, thereby obscuring the true clearing rate. This cost is hidden from the client but is actually part of what NCFX calls “the idiosyncratic cost.” Measuring against the unbiased NCFX Mid-Rate allows the true idiosyncratic price change to be identified. Measuring costs against the NCFX data feed is accurate.

Regulators have already woken up to the issue. According to ESMA, “In calculating the costs associated with foreign exchange, the arrival price must reflect a reasonable estimate of the consolidated price, and must not simply be the price available from a single counterparty or foreign exchange platform, even if an agreement exists to undertake all foreign exchange transactions with a single counterparty.”

One broker’s price is not the forex market

In other words, a single broker’s CFD price on a given FX pair is not gospel, for from it. The same goes for prices coming from a single bank. The consolidated price is the holy grail for traders and brokers.

It is unlikely to ever be possible to trade forex on the rate generated by NCFX, but the benchmark is there as an excellent measurement of skew and something for forex brokers to aim for. Prior to this, investors of all stripes were still groping in the dark when it came to arriving at an accurate measure of where a given currency pair is really trading.


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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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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