US investment firms are reviewing their best execution policies as a result of MiFID II, the new rules covering financial markets in Europe, despite not being directly overseen by a European regulator.
A survey by consultancy Tabb Group found that 26% of US buyside firms said MiFID II has triggered a review of their best execution policy. Globally, 81% of buyside firms are currently reviewing or have reviewed best execution policies in the past 12 months. In August this year Tabb Group conducted research with 81 global heads of trading, more than 70% of whom were institutional investors based across the globe, for a new report, “Best Execution: The New Partnership.”
Author Rebecca Healey wrote that under MiFID II investment firms are required to take all “sufficient steps” to achieve best execution. Asset managers will have to annually publish their top five execution venues in terms of trading volumes and the factors used to choose venues “in sufficient detail and in a way that can be easily understood by clients.”
Healey said: “This will require firms to make significant changes to their systems, technology and workflow processes, to ensure compliance.”
In the survey the majority of European and UK firms are choosing to monitor best execution via transaction cost analysis and analytics, while 34% of US respondents rely on internal compliance processes and 17% on broker reviews.
“While many firms focused on TCA and third-party analytics, several firms acknowledged that they are reaching limitations with current providers and are now looking for greater capabilities and richer analysis,” added Tabb
The biggest concern among UK and European firms in monitoring best execution is the lack of a consolidated tape in Europe. In contrast US firms are more concerned about the provision of data by the sellside and their internal inability to compare brokers’ execution capabilities .
Another issue is that the buyside has traditionally paid for execution through trading commissions in return for the provision of free research from the sellside. The European Securities and Markets Authority has said this could lead to conflicts of interest and wants asset managers to pay for research from specific accounts which have a budget agreed with their client.
“As such there is an increased focus towards a quantitative data metrics approach by heads of dealing to demonstrate they meet delivery of best execution,” added Tabb.”The technology arms race is increasing and market complexities will potentially offer those brokers with scale and technology an ability to differentiate.”
Ralph Achkar, capital markets product director at Colt Technology Services, which provides data connectivity products, said in a blog this month that the MiFID II requirement to take “all sufficient steps” to ensure best execution is stricter than “all reasonable steps” specified under MiFID I and this change will have a huge impact.
Achkar said: “Clearly there is an opportunity for participants to use their best execution policy as a competitive advantage. Instead of seeing this as a difficult regulatory hoop to jump through, best execution may turn out to be the advantage that many firms are looking for.”
He added that MiFID I resulted in the entry of a number of new venues and firms in Europe and the same is likely to happen after the implementation of MiFID II in either 2017 or 2018. “Instead of seeing MiFID II as a good way to use up IT and compliance budgets for the foreseeable future, market participants should instead focus on how their organisation is positioned to become a dominant force in a post-MiFID II landscape,” continued Achkar.
