Investors oblivious to rising costs of trading derivatives

Investors oblivious to rising costs of trading derivatives
1st May 2019 Maxime Jeanniard

Investors are being left in the dark as to the huge additional costs their asset managers are incurring to transact highly complicated derivatives.

OpenGamma research shows that transaction costs incurred when trading FX Options can be misrepresented to investors by as much as 400%. Transaction costs are the difference between the price of a trade an asset manager decides to buy or sell, and the actual price of the transaction, which could include fees such as commissions and taxes.   

When trading FX Options, asset managers have to factor in costs driven by unpredictable factors, including maturity of the asset, volatility and widening or tightening of spreads. The problem is that pricing information cannot be directly seen in the market for certain derivatives, making calculating these costs virtually impossible.

OpenGamma research shows that transaction costs incurred when trading FX Options can be misrepresented to investors by as much as 400%. Click To Tweet

Pressures to display greater transparency to investors have been heightened due to MiFID II – which forces asset managers to disclose in both percentage and monetary terms the costs involved in buying and selling securities. Our research also suggests though that the difficulty in calculating the implicit costs of transactions, particularly when trading illiquid derivatives, is due to prices not being directly observable. 

Our CEO Peter Rippon has commented on the findings:“Ultimately, it is the end-investor that will continue to suffer unless asset managers reform their approach to cost analysis. The underlying issue is that too many asset managers continue to follow the broad nature of the MiFID II rules, applying a ‘one-size fits all approach’ for non-standardised derivatives, which only leads to inaccurate results. Without prescriptive details within the regulation, it is very easy to overestimate. Until a fresh approach to analysis is widely adopted, investors will continue to be left blissfully unaware about how much of their money is being gobbled up by transaction costs”