Transaction cost analysis (TCA) is used by institutional investors and investment managers to analyse trade data to evaluate whether they were executed at fair prices. TCA usually refers to post-trade analysis but may also be carried out pre-trade to choose the procedure to be used to execute a specific transaction or set of transactions.
For post-trade TCA, the starting point is a set of accurate data about the transactions to be analysed including precise trade timing, which is known as the ‘time stamp’. This data can then be compared to benchmark trade prices to calculate the ‘slippage’, which is the difference between the actual trade price and the benchmark price.
TCA is more complex in FX than in equity markets as there are no transparent and complete data sets about all the transaction volumes and prices traded. In addition, fair execution prices will vary considerably depending on the size of a transaction and how fast it needs to be executed. As a result, practitioners may use a variety of benchmarks to get a complete picture of the quality of execution.
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