Investors bemoan Mifid II best-ex failings

Lack of consistency in data provided by trading venues undermines transparency drive

Data deluge: users struggling to cope with Mifid II trade information overload

Financial market rules forcing trade venues to publish data are failing to improve best execution for investors, say users, amid complaints that the information is hard to collect and compare because it is provided in multiple formats.

The Mifid II regime, which came into force across the European Union at the start of 2018, introduced a raft of laws aimed at improving transparency within the region’s financial markets. Among them is a rule, known as RTS 27, ordering trading venues to publicly disclose the quality of execution for firms transacting with them or on their platforms.

But most buy-side firms aren’t making use of this source of trade data, according to sources, raising fears that the regime may be falling short of its intention to improve best execution within financial markets.

“The message has been the same whether you’re a small emerging market fund or you’re one of the biggest global asset managers. They’re not really finding much use from RTS 27 at the moment,” says Michael Richter, executive director of trading analytics at IHS Markit, which provides trade technology. “They’re overwhelmed with this huge file of data. They don’t know what to do with it.”

Execution venues now publish dozens of data points quantifying trades across asset classes on a quarterly basis – including prices and costs associated with transactions. The data is made available in various file formats and schemas, with some firms publishing all their data in one file and others including the data in multiple files – as many as 120,000 in the case of one firm.

The resources required to aggregate this information, let alone attempt to interpret it, is beyond the reach – or appetite – of many buy-side firms.

We have to focus on what’s most important to our clients here and hiring a team to do this
Mark Denny, Investec Asset Management

“We have to focus on what’s most important to our clients here and hiring a team to do this – which is probably what we’d need both from a personnel and hardware/software perspective – would have been completely mad,” says Mark Denny, head of global equities trading at Investec Asset Management, a £100 billion-plus manager.

Instead, Investec opted to outsource the analysis to an external vendor, BestExHub, to help determine which parts of the RTS 27 data are most important to it. How buy-side firms make decisions based on the data is the subject of another European Commission directive, RTS 28, which requires investors to reveal their top five execution venues for transacting client orders, among other elements. These reports are due out at the end of April.

According to a survey published by trade association ICMA, only 5% of buy-side and sell-side respondents reported a “high” interest in others viewing their RTS 27 or RTS 28 reports. Roughly 80% said Mifid II best execution measures have had little or no change to their trade execution processes.

US trading firm Northern Trust Capital Markets sees a rationale for the introduction of the new transparency regime, though. Gerard Walsh, head of business development at the institutional brokerage arm of the firm, says the buy side is “getting much better at providing explanations about where and why we’ve made execution decisions to use different execution venues to access different pools of liquidity at relevant prices”.

Different strokes

But until the data is supplied in a consistent manner across the industry, firms will struggle to compare trade information. Ronen Kertis, chief executive at compliance and regulatory technology firm Cappitech, says execution venues are packaging up the data in different ways.

“Some would have a file per instrument per day. Some would have a file per instrument for the quarter. And some would give column X a name, and another would give the same column a different name. So it’s quite hard to look at that and compare,” he says.

Once investors have cleared the hurdle of aggregating the information, next they must attempt to interpret and analyse it.

“This information, depending on how it’s used, is going to mean different things to different funds and strategies,” says Garrett Nenner, global product manager for trading at Linedata, a regtech firm. “Some companies will say, ‘This is interesting information, but it doesn’t really pertain to how we time our investments and place our trades, and I can show that our executions at the time they were made were the best’.”

[Investors] are overwhelmed with this huge file of data. They don’t know what to do with it
Michael Richter, IHS Markit

Firms that are closely involved with the execution process have a larger incentive to examine the data. For GPP, which aggregates and executes trades for small investment managers, small differences in trade costs can make a big difference to the bottom line.

“A lot of our trades are smaller in size because we have smaller clients. Therefore any settlement and ticket fees have a larger impact on the net trade economics,” says Massimo Labella, GPP’s head of multi-asset execution sales.

The firm outsources its best execution analysis to a third party, but is in the process of using RTS 27 data to better understand liquidity dynamics across trading venues.

Although the ICMA survey suggests a majority of buy-side firms are seeing no benefit from the Mifid best execution regime, BestExHub reports that five of the 26 companies using its service are on the buy side and that interest from such firms has been growing in recent months. The tech firm has spent five months aggregating RTS 27 data into an accessible API, which will enable clients to plug their systems into its data.

Daniel Mathews, co-founder of the firm, says: “The buy side are typically not downloading all the data through the API. They’re just interested in certain instruments they have previously traded, and then doing their analysis at the instrument level for their execution quality monitoring purposes.”

The more actionable impacts of readily available best execution data may be months, or even years, in the making, though.

“We all know it wasn’t going to be perfect at the start, and it will improve,” says Elizabeth Callaghan, a director at ICMA focusing on secondary markets electronic trading and market structure. “There is a lot of momentum for getting this right.”

This article first appeared on sister website

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