July 13, 2017 / 1:49 PM / 10 days ago

DERIVATIVES-BestX plans TCA expansion to liquid rates

LONDON, July 12 (IFR) - Start-up foreign exchange analytics platform BestX is set to expand its transaction cost analysis tool in 2018 to fixed income markets, enabling participants to define and demonstrate best execution for liquid rates products in compliance with MiFID II.

The best execution firm, which was founded by former Morgan Stanley executives Pete Eggleston and Oliver Jerome, launched post-trade transaction cost analysis in September 2016 for spot FX, forwards, non-deliverable forwards and FX swaps. A pre-trade analysis tool was added at the start of this month, while TCA for vanilla FX options will be launched in the coming weeks.

Under sweeping MiFID II reforms taking effect from January, market participants must prove best execution on a broad range of over-the-counter trades, including bonds and swaps. That has led to calls for the new FX tool to be expanded to fixed income products.

"Enough of our clients have asked for us to provide the service for more than FX that we thought we should do something," said Eggleston, director of BestX.

The firm recently hired a fixed income quant to build a platform for the asset class, beginning with the most liquid products, such as interest rate swaps, sovereign bonds and fixed income futures.

"We've built a rigorous FX platform and we didn't want to bolt on something that was not implemented to the same rigour so we're starting in the rates space where there's sufficient data to do something rigorous and meaningful," said Eggleston.

Expansion into investment grade credit products analytics is expected to follow later in 2018.

MiFID II requires participants to achieve the best possible result for clients, taking into account a range of execution factors, which can include overall trade cost, spread impact and signalling risk.

"The MiFID II definition is a good one as it talks about different factors and is a much more holistic view of best execution. We're no longer in a world where people just equate best execution to best price,” said Eggleston. “You may well trade on the best price, but your counterparty could then go and spray that risk across the market, creating an enormous footprint that may be very damaging to you if you've got more trades to do that morning."

BestX enables participants to implement and codify their best execution policy in the software and ensure those parameters are met using data from a broad range of sources.

Less than a year since launch, BestX has attracted 20 live clients with more than 20 others currently in talks for onboarding. While primarily a buyside tool, the initial crop of clients includes JP Morgan and HSBC, which are using the service for independent validation on execution quality for their own clients.

"A lot of clients really like the way we're thinking about execution in the OTC world because we're not just taking equity-type models and shoe-horning them into an OTC world," said Eggleston. "Some of our clients have been frustrated with products that take an equity framework and try to adapt it for rates. We're really thinking about it from an OTC perspective and that's a real differentiator."

Equity best execution products are built around a framework that processes trades after the market close for next-day reporting. That is not easily adapted for OTC markets, particularly FX and rates, given the round-the-clock and global nature of trading.

"We've been able to build something totally real-time so a client doesn't have to wait until tomorrow to see what the metrics look like around best ex on a given trade. They'll get it a few seconds after the trade has finished," said Eggleston.

Real-time analysis is supported by high performing coding language, Julia, while cloud computing ensures BestX can handle large volumes of data compared to legacy providers, which typically use batch-based architecture.

Last December, the start-up struck an agreement with Thomson Reuters, IFR's parent company, for data and connectivity with TR's FXall and FX Trading platforms. (Reporting by Helen Bartholomew)

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