FX Best Execution PracticesFX Transaction Cost AnalysisMiFID iiProprietaryThe Case for Mid-Market Rates in Over-the-Counter FX Transaction Cost Analysis

May 1, 2019by John Galanek

FX Transparency’s white paper asserts that the buy-side’s cost of transacting in the currency market is equal to the
profit that a sell-side bank earns on the trade from its market-making operations. We contend that on
average, the market-making banks off-set risk at the mid-market rate because sometimes they cross the spread, while other times they get filled at their bid level to off set risk.
When determining the buy-side’s FX transaction costs, we simply calculate the difference between the transacted rate and the mid-market rate in basis points and multiply that by the volume of the transaction. Market-making banks do not charge a
commission to trade FX. This is further evidence that they capture a good portion of the bid / ask spread
to compensate themselves for the risk taken in providing liquidity.

This paper asserts that the mid-market price should be the benchmark data set against which transaction costs are measured in OTC currency markets. Download the full paper here.