Efficient FX execution during periods of market stress

Key takeaways

• Periods of geopolitical stress, including recent developments in the Middle East, can materially increase FX transaction costs as volatility widens bid–offer spreads and fragments liquidity across trading venues.

• In these environments, broad access to multiple liquidity providers and venues enhances market depth and supports more resilient price discovery.

• Consistent, independent transaction cost analysis strengthens accountability across market cycles and provides measurable evidence of return preservation through disciplined FX execution. 

When geopolitical tensions rise, currency markets are one of the first to react.

In stressed markets, accessing diversified liquidity across venues becomes critical as implicit FX transaction costs can rise materially.

We saw that again as tensions escalated in the Middle East. Currency markets adjusted almost immediately. Energy prices moved higher. Investors moved toward safe-haven currencies. Volatility picked up across both developed and emerging markets.

In these periods, liquidity conditions can change quickly where bid-offer spreads, an indication of implicit transaction cost for trading FX, can increase significantly. Market depth can also thin, making it more difficult to trade, with pricing that can vary meaningfully across trading venues.

For global investors with FX trading and currency exposure management needs, this is precisely when execution quality matters most, and avoiding trading with a single counterparty or channel becomes critical.

In stable conditions, liquidity in many developed and emerging market currency pairs can appear abundant. However, during stress events liquidity fragments and as counterparties step back risk appetite, pricing can become less consistent.

Following the recent Middle East escalation developed market currency volatility moved materially above expectations, while emerging market currencies experienced even larger relative increases as investors repositioned toward the U.S. dollar and other defensive exposures. Volumes increased as investors flocked to safe haven currencies. Volatility climbed significantly as USD buying pressure rose, running around 40% higher in developed market currencies and almost 100% higher in emerging currencies versus expectations.

We saw similar behavior at the start of the Russian invasion of Ukraine in 2022. Currency markets saw a significant increase in implicit transaction costs, with bid-ask spreads in those countries’ currencies with greater proximity to the conflict climbing by as much as 500% versus their normal levels.

Foreign exchange remains a meaningful contributor to counterparty bank trading revenues. In stressed markets, directional trading volumes tend to rise at the same time bid–offer spreads widen. For asset owners and managers, wider spreads can create a material cost in their portfolios. When volatility increases and liquidity becomes selective, the way trades are sourced and routed begins to influence outcomes in a measurable way.

That is why clarity of incentives is central for global FX trading during volatile periods. Decisions around timing, venue selection and counterparty engagement should be guided by client outcomes, not by balance sheet considerations. An agency FX execution approach built around broad venue connectivity supports diversified liquidity sourcing and continuous price discovery across markets, leading to improved investor outcomes by reducing implicit transaction costs. When liquidity fragments, access to multiple providers reduces reliance on any single counterparty and helps contain implicit transaction costs.

A disciplined framework can assist through robust independent transaction cost analysis (TCA) and transparent reporting. Independent measurement, across both calm and volatile periods, allows investors to evaluate execution quality relative to prevailing market conditions. It also supports governance, enabling investment committees and oversight bodies to assess whether execution outcomes remain consistent with expectations.

Based on independent TCA analysis on average FX execution for 2025 alone (including both developed and emerging market currencies), employing an agency-only framework delivered circa 5.7 basis points in savings versus the average custodian bank.

Periods of market stress are inevitable. Currency markets will continue to react quickly to geopolitical developments, policy shifts and macroeconomic shocks. While volatility itself cannot be controlled, execution discipline can.

A globally diversified liquidity network that’s clear on alignment of interests, is consistent and transparent in measurement, together form the foundation of efficient FX execution. When markets are under pressure, that foundation can help contain costs, preserve value and allow investors to remain focused on their long-term objectives.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.

1. Source: Russell Investments “RIIS” Trading Data, covering calendar year 2025. Performance data sourced from FX Transparency (external TCA provider). Average transaction cost -0.13bps (including EM/restricted currencies); +5.71bps cost savings versus average custodian. 

1. Source: Quarterly Report on Bank Trading and Derivatives Activities, Office of the Comptroller of the Currency. FX identified as a significant contributor to U.S. bank trading revenues.