Transaction Cost Analysis (TCA) in the FX Market
Overview
The foreign exchange (FX) market is the world’s largest and most liquid financial market, with daily turnover exceeding $7.5 trillion. Unlike equities or bonds, FX has no central exchange — it is an over-the-counter (OTC) market where participants trade directly with one another, typically through banks and electronic platforms.
For corporates, FX matters because international business creates currency exposures. Sales, purchases, investments, and funding in foreign currencies all introduce risks that can impact earnings, cash flow, and competitiveness. FX trading is therefore not speculative for most corporates — it is a necessary by-product of operating globally.
The FX market brings together a wide range of participants: global banks act as liquidity providers, asset managers and hedge funds trade for investment purposes, central banks intervene for monetary policy, and corporates trade to hedge operational exposures. This diversity of participants and the sheer size of the market make FX extremely liquid at certain times of the day — currencies can typically be exchanged in large amounts within seconds.
FX market trade types
- Spot: Immediate exchange of currencies, typically settling in two business days.
- Forwards: Agreements to exchange currencies at a set rate on a future date, used extensively for hedging.
- Swaps: Combinations of spot and forward transactions, allowing firms to roll or adjust hedges and manage liquidity efficiently.
Together, these instruments give corporates the flexibility to manage their global currency exposures. But the way FX trades are executed — and the costs hidden within them — is where the story becomes more complex, and where best practices and transaction cost analysis begin to matter.
FX market conventions
Electronic trading has radically changed the market from an open-cry voice trading system to a semi-automated push-button environment. Much of the activity and terminology that characterized large sell-side sales and trading operations are disappearing. Computers have changed the necessity of learning a new language and hand signals. What has not changed is the bank’s focus on maximizing profits.
Those profits have grown considerably with the increased volume in daily market turnover. JP Morgan Chase reported revenues of $5.5 billion in 2023 and Goldman Sachs reported market-leading revenues of $6.3 billion in 2024. In the 2001 triennial survey, the Bank for International Settlements reported daily turnover of $1.2 trillion. Around that time two global banks reported that they earned between $33 and $35 per million traded across all currency pairs. In the April 2022 survey, the FX turnover was over 6 times the 2001 survey at $7.5 trillion. Annual revenues around the turn of the century were around $2 billion, so it can be argued that the banks are not earning $35 dollars per million in the electronic age. Nevertheless, $5–6 billion in FX revenue is impressive, and that revenue is an expression of the spread earned on all transactions.
For the corporate trader, that spread should be of paramount importance. Due to the quid-pro-quo nature of corporate banking relationships, are your spreads reflective of the services provided? Are there excessive or hidden spreads in your transactions? The good news is that it is possible to accurately measure your trading costs if you subscribe to a reputable, independent transaction cost analysis service (FX TCA).
FX TCA will take your execution data and compare it to the available interbank market rates for spot and forward rates. The market standard for spread measurement is your execution rate to the market mid-rate on a millisecond basis. You should be aware of how this is done for each transaction type and be familiar with the expected spread cost for each transaction by currency pair, size, tenor and time of day.
FX market trade types: spot, forward and swap
Measuring the spread of a trade at the time of execution is relatively simple on a high level:
Execution rate – Market mid-rate = spread
The spread above is expressed in pips and needs to be converted to a percentage of the market mid-rate. That percentage for liquid currencies is so small that it is translated into basis points (1/100th of a percent) so that you can compare the spread across different currency pairs. At AtlasFX, we also refer to the spread in CPM or Cost Per Million. That makes it even easier to conceptualize the revenue being extracted from each transaction type by your foreign exchange counterparty.
Spot: Immediate exchange of currencies with settlement typically at T+2. One key aspect of this settlement operation is that one- or two-days’ worth of interest is embedded in that rate (depends on the settlement period). Typical spreads for G7 currencies are now between $20 and $25 per million.
Forwards: Agreements to exchange currencies at a set rate on a future date. For TCA purposes, you measure the spread on the spot rate and spread on the forward points individually and then total them as a combined spread. Forward prices need to be adjusted for interest rate differentials — banks have replaced lost revenue in the spot market by expanding forward point costs.
Swaps: Primary tool for currency hedging. Even swaps have no spot costs, only forward costs. Average spreads for swap transactions in G-10 currencies are often less than $10 per million, but banks may increase your swap rates beyond average if they know you’ll roll hedges with them. Monitor uneven swaps closely to avoid hidden spot costs.
FX market trade types: Non-Deliverable Forwards (NDF)
A non-deliverable forward (NDF) is a derivative foreign exchange contract used when offsetting risk in currencies that are not freely convertible or subject to capital controls. Transaction cost considerations are simpler than expected for a derivative product. It is solely the spread between the executed forward rate and the interbank forward mid-rate. These markets are less liquid and spreads are naturally wider but NDFs provide a practical way to hedge exposure in restricted markets.
FX market trade types: on-shore restricted currencies
In developing markets, currency trading is generally limited to local residents, banks licensed in that country, and corporates with underlying commercial needs. Foreign investors and non-residents may face restrictions such as approval requirements, limits on conversion or repatriation, or bans on offshore trading altogether.
Examples include the Chinese yuan (CNY), Indian rupee (INR), Malaysian ringgit and Brazilian real (BRL), where governments use onshore restrictions to maintain control over capital flows, monetary policy, and financial stability. For corporates, these rules mean that hedging and settlement must often take place in the domestic onshore market through local banking partners — which can create challenges: less liquidity, higher transaction costs, slower processes, and limited ability to use global trading platforms.
Conclusion
The foreign exchange market is vast, complex, and central to how corporates manage global business. Spot, forwards, swaps, NDFs, and onshore restricted currency trades provide the flexibility to manage exposures, but each comes with its own mechanics, risks, and costs. While the market is highly liquid, execution quality and pricing transparency can vary significantly depending on timing, transaction type, counterparty, and currency.
For corporate treasurers, FX is not about speculation — it is about protecting earnings, ensuring predictable cash flow, and preserving capital. Yet the way trades are executed can materially impact the bottom line. Understanding market conventions, the hierarchy of currency pairs, and the nuances of each transaction type is essential. This knowledge lays the foundation for identifying best practices in execution and, ultimately, for applying transaction cost analysis (TCA) to measure and improve outcomes.
In short, mastering the basics of FX TCA and how to recognize excess costs is the first step. The next step is ensuring execution quality — turning treasury’s FX activities into a source of measurable value for the business.
