Measuring best execution in FX and customising it

I'm a bit hopeless at cooking. I can do a bit of baking, in particular chocolate chip cookies, with a secret recipe which I've developed over time to make the cookies chewy and particularly sweet, to suit my tastes. Recently, I made Turkish orange cookies (above) for the first time. Whilst they tasted good, I still think they can be improved. Most likely it'll will take a bit more time to work out how to tweak the recipe to get it just right. It's all about getting those details right and customising the recipe.

What does this have to do with markets? Very often we might think we have a simple recipe to make money or do analysis of markets, but it requires significant customisation to get it right! Take the idea of best execution which seems very simple. Basically we want to show that we got the best price for our execution. We can use transaction cost analysis to do this. However, in practice TCA can become very complex, once we delve into it. Let's say we want to measure the slippage on an individual trade. We simply measure the difference between our executed price and a market benchmark of a mid. What precisely could be a benchmark for the market can be difficult, as the FX market is fragmented. The price you get quoted can often vary, for a number of reasons, related to your credit line, whether last look is enabled on the venue etc.

In practice, we want to be able to create an aggregated price from many the streams collected from a number of different venues, at a high frequency. Trying to manage this process, will involve aggregating a large amount of tick data. There are vendors such as New Change FX, who generate a benchmark through aggregation process, reducing the amount of work required. Even if we manage to show that slippage is low on a trade, that's probably not the end of the story. After all, if slippage is very tight, but the market impact of every trade is very large (ie. the price moves against us significantly every time we execute) and we are executing over a long period of time, then on aggregate our price could be very poor. What is the proportion of our trades which are actually filled....

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