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New Change FX releases a new suite of APIs for real time transaction cost analysis

Jan 27, 2021

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New Change FX releases a new suite of APIs for real time transaction cost analysis.

London, 27th January 2021

New Change FX (NCFX) is pleased to announce the release of four new APIs that allow users to compute the cost of foreign exchange (FX) transactions in real time as trades are executed.

The goal of transaction cost analysis is to measure the cost of transacting FX with a given liquidity provider, and then to use that information to inform future transactions.  To achieve better order routing choices, it is imperative that the calculation of costs is both sufficiently detailed and presents cost in context.  Doing so means that the resulting information can be used instantly in guiding the next transaction.  At present analysis is latent to the execution point and may not be in a machine useable format that can be fed back into the execution decision process.  The NCFX API suite solves this issue for traders.

The API suite allows users to move past simple measures of post-trade decay and start looking at more complex measures of cost.  By normalising costs for market conditions, the trader can access significantly more information about their liquidity provision, and the value offered by individual liquidity provider.

The full API suite includes:

The Unit Cost of Volatility

This API scales effective spread by units of volatility. Effective spread is calculated as the difference between the dealt rate and the mid-rate when the order was externalised to the market. Volatility is converted into a USD value that factors the amount of time taken to complete the trade and the amount traded.

By normalising costs with realized volatility users can compare costs across currencies, times, periods of different volatility and size of trade, allowing comparison of costs using the same metric; costs incurred as a ratio to the market risk prevailing during the life of the trade.

USD Cost of Volatility

This API calculates the inventory risk in USD terms of an open currency position based on the prevailing market conditions (volatility) through time. Using the period given by the start time and end time of an order, the model multiplies the amount traded by the volatility and converts into USD dollars.

By normalising costs with volatility users can compare costs across currencies, times, periods of different volatility and size of trade, allowing comparison of costs using the same metric; costs incurred as a ratio to the market risk prevailing during the life of the trade.

Implementation Shortfall

This API measures the execution costs at different moments during the life of a trade, from when an order is generated in the Order Management System (origination) to when an order is externalised to the market creating market impact, to the moment of execution.

Price Impact (Temporary and Permanent)

This API calculates the Perold measure of market impact, also known as the effective spread. It measures execution against the mid-rate prevailing when the order is externalised to the market. It produces two cost items: A permanent cost which is captured by the movement in mid-price between submission and execution and temporary cost which is the instantaneous half spread at the execution timestamp.

Decay

This API can be called for both pre- and post-execution decay.  The API measures the cost of execution at different timestamps by calculating the difference between execution rate and the mid rates prevailing before and after the trade.

Benefits

The creation of this API suite means that programmers are now able to access calculations from an independent source that uses only benchmark data in creating those calculations.  The independence of NCFX data means that the user can be certain that the values received are not tainted or skewed by the liquidity provider being analysed but are reliable in themselves and are consistent with regulatory obligations to use independent data when calculating costs associated with foreign exchange execution.

How to access the APIs

Access to the APIs can be supplied by NCFX to users with credentials that are available via the NCFX client portal (https://portal.newchangefx.com).