State Street has acquired BestX, a London-based provider of transaction cost analysis in foreign exchange, adding to its focus on front office technology after announcing the acquisition of Charles River Development, a provider of order management and execution management systems, last month.

In January State Street said that its foreign exchange execution venue, FX Connect, would partner with BestX to offer TCA solutions globally.

Oliver Jerome, co-founder of BestX, said in a statement at the time: “FX Connect and BestX have many mutual clients, our platforms are extremely complementary to one another, and the potential benefits to the buy side from this partnership are significant. This integration is a key milestone for us in the path to being the industry standard for FX TCA.”

Jerome and two other former Morgan Stanley colleagues, Pete Eggleston and Aman Thind, founded BestX in 2016.

During the course of their relationship, State Street found that BestX added significant value to clients by providing both pre-trade and post-trade analytics, leading to the acquisition. Financial terms of the deal were not disclosed.

In addition MiFID II, the European Union regulations that came into force this year, strengthened the requirements to evidence best execution across asset classes including fixed income and some foreign exchange transactions, excluding spot FX, for the first time. The FX Global Code of Conduct has also encouraged increased transparency following scandals in the market.

As a result State Street has been experiencing significant increase in demand from market participants for TCA analytics and is looking to deliver a full multi-asset offering. In fixed income, a test product was launched this summer covering liquid sovereign bonds. The aim is to expand to include emerging market sovereigns and corporate credit markets, which require more comprehensive market data.

Integration with Charles River

Last month State Street announced the acquisition of Charles River Development, which is expected to close in the next quarter.

Kevin McPartland, head of market structure and technology research at consultancy Greenwich Associates told Markets Media in July that the acquisition puts State Street in a better position to tap into an $8bn (€6.9bn) revenue pool for front-office services across the industry.

McPartland said: “These trading tools are only getting more critical to the buy side, as compliance requirements grow and markets continue to become more electronic.”

Jay Hooley, chief executive of State Street, said on a conference call discussing the Charles River acquisition that the front office has the most explosive growth opportunities. Hooley said: “People are feeling pressure to consolidate systems, get at data and replace tired proprietary systems.”

One of the aims of the Charles River acquisition is to allow State Street to provide clients with a full front-to-back service. It is likely that it will become even easier for Charles River clients to feed order data directly to BestX once the deal closes. Therefore, the combination of the platforms should allow clients to improve their execution process and decision-making, while complying with fiduciary and regulatory best execution requirements.

TCA arms race

MiFID II also introduced pre-trade transparency requirements and post-trade reporting across asset classes for the first time. This means that TCA and best execution have become fundamentally interchangeable functions according to a recent report from consultancy Aite Group, MiFID II Best Execution: Multi-Asset-Class TCA Goes Mainstream.

Audrey Blater, PhD, author of the report, wrote: “The TCA arms race will translate into more and better technology, benchmarks, and functionality, which will be required to stay competitive and satisfy the growing demand.”

Therefore expansion into multi-asset-class TCA is an area of growth for many vendors, particularly in the fixed income and derivatives, although they suffer from a paucity of readily available market data.

Other trends are that vendors will offer TCA solutions that become more customized and granular in mature areas, such as equity and even foreign exchange, especially as there are improvements in market data sources that allow the creation of established benchmarks.

Amongst the buy side, the use of TCA for alpha generation is still in nascent stages at some institutions according to Aite.

“Two asset managers that seem similar on paper will have different performance results given their ability and willingness to use cost analysis in their strategies,” added Blater. “At some point, this difference is expected to become a battle of the haves versus the have-nots.”