By Chris Jakob

Have you ever tried to build your own house? Know anyone (who’s not a licensed contractor) who has done it? Probably not. It takes a specific skillset, years of experience and an abundance of time most people don’t have. So why should your approach to a foreign-exchange transaction cost analysis platform be any different?

I have headed up a number of different trading desks for asset management firms during my 20-plus years in investment management. I have traded equities, fixed-income, commodities and currencies for fundamental and quantitative investment disciplines.

When it came time to see how my desks were trading or whether we were getting “best execution,” I had to tap into the various trading platforms my firm owned to measure my transaction costs. The firms I worked at ranged in size and infrastructure, so I was forced to use a combination of platforms that had been purchased and ones built in-house.

In theory, building an in-house system sounds like a good idea—you can customize the platform to the asset class you’re trading and “save money” by building it yourself.

That’s the theory, anyway. Having been involved in an in-house project, I can tell you it is easier said than done. Much easier. To begin with, our business was asset management and not transaction cost analysis. Therefore, it was a major challenge to obtain, verify and maintain the data necessary to measure the trades. A number of different data providers sold us data for exchange-traded securities, but it wasn’t always complete or accurate.

To ensure the data was complete, it was my firm’s responsibility to check against other data sources to identify outliers, and that meant spending more money on data. We used data from three different independent sources. As you might imagine, this verification—or “scrubbing”—of the data was time consuming and expensive. When it came to over the counter (OTC) assets, fixed-income and FX, the challenges became even greater to verify the reliability of the data we had assembled.

Never mind the fact that building a platform and then measuring your own transactions can be a huge conflict of interest. That detail becomes particularly significant if you’re using the results to present to a regulatory body or client. What is the incentive to say you are doing a poor job?

Conversely, purchasing a platform to measure transactions has a fixed cost for the platform and, in the long run, is cheaper than building an in-house system—not only in dollar terms but in man-hours as well.

There are many companies and platforms to chose from, of course, so it takes a bit of research and due diligence to determine which company offers the better platform and reporting functionality. During my investigation of the market place, I found that some companies offered “one stop shopping.” This means they are likely strong in one asset class but not in all of them. There are so many nuances and details to pricing trades in FX correctly that asking a “jack of all trades” to measure your currency costs is like using a handyman to wire your entire house, instead of a licensed electrician.

If you are thinking about measuring your foreign exchange trades and considering building your own—think again. It may end up costing your company more than you imagine.