Trading by investors using transaction-cost analysis in the foreign-exchange market has increased this year amid regulatory scrutiny and clients requesting more transparency, according to Greenwich Associates.
Transaction-cost analysis use on foreign-exchange products increased to 33 percent this year from 28 percent in 2011, according to a 69-person survey of global buy-side institutions conducted by Greenwich. Forty-one percent of institutions with more than $20 billion in assets use it for foreign-exchange, Greenwich said. Transaction-cost analysis is the study of trade prices to determine whether transactions were favorably arranged, low prices for purchases and high prices for sales.
“Investors and people they work for are going to be requiring more information on what’s going on with their fund flows,” Kevin Kozlowski, an analyst at Greenwich, said in a telephone interview. “As you’ve seen post-2008 financial crisis, investors have found the need to better understand what’s going on with their money.”
The Volcker rule, part of the 2010 Dodd-Frank regulatory overhaul, will limit the risks that deposit-taking banks can accept. The rule, which hasn’t been finalized, aims to reduce proprietary trading at banks. Bankers’ trading activities have also been curtailed by higher capital requirements under a new regulation known as Basel III.
A larger portion of European institutions have adopted transaction-cost analysis for currency transactions than their North American counterparts. It is being applied to foreign-exchange trading by 30 percent of users in Europe, compared with 22 percent in North America, according to Greenwich data.
The more active usage in Europe can be partly attributed to the European Union’s Markets in Financial Instruments Directive, for which transaction-cost analysis data can be helpful for meet strict reporting requirements, according to Greenwich.
“In any jurisdiction, there is now a requirement for the reporting of more information and reporting on a more formal basis,” Kozlowski said. “People are starting to pay attention now to get ahead of the curve.”