The cost of non-negotiated foreign exchange trading by global custodians dropped 63% in 2010, compared to the average cost over the previous nine years combined, but it's unclear whether a legal controversy over whether custodians are overcharging is the cause of the decline, according to a report Monday by FX Transparency.
The firm, which provides FX transaction cost analysis for institutional investors, found overall foreign currency trading cost dropped to 11 basis points in 2010 from an average of 30 basis points between 2000 and 2009, according to a news release form the company.
“The key question for investors is: Is this a permanent, positive change in the execution quality of these kinds of FX trades, or a knee-jerk reaction to the legal events that began in the fall of 2009?” James McGeehan, FX Transparency's CEO, said in a news release. Despite the reduction in 2010, costs are still three to four times higher than they are for negotiated trades, he said.
State Street and BNY Mellon currently face lawsuits claiming they overcharged pension plans for currency trades. The custodians have denied wrongdoing.
Mr. McGeehan declined further comment on the report, but those with knowledge of the report say the firm analyzed 500,000 trades between 2000 and 2010. According to the news release, all costs were calculated against the interval time average price, which is FX Transparency's proprietary proxy for volume-weighted average price.