In an HSBC-sponsored study, Edhec-Risk Advisory questioned 127 buy-side firms about their level of preparedness for MiFID’s Article 21, which stipulates that firms must prove compliance with a Best Execution strategy. 26 responses to Edhec’s questionnaire were provided by hedge fund managers while 101 responses came from traditional asset management firms.
“Pre-trade analysis forms an essential part of ensuring that best execution can be achieved, yet out of 83 responses, only half confirmed that they use pre-trade analytics,” says the study, entitled ‘European Transaction Cost Analysis Survey’. “If pre-trade analysis allows the intermediary/trader to optimally design its execution strategy, it is also striking to note that only one in seven traditional asset managers and one in four hedge funds can return an order unfilled when execution conditions are not favourable,” it continues.
The majority of respondents reported that once an order was placed, they sought to execute it at all costs. “This surprising result confirms that changes are desirable not only for the trader but more globally in the entire relationship between the manager and the trader,” notes the study.
Only 60% of hedge fund respondents say they are using the Financial Information eXchange Protocol (FIX). “This demonstrates that smaller firms are slower to adopt the protocol, and probably also slower at digitalizing their entire execution flow,” says the study.
Transaction Cost Analysis (TCA) is likely to form the cornerstone of any future academic and industry development related to the new Best Execution obligation, according to Jean-René Giraud, director of development, Edhec Risk and Asset Management Research Centre. “Yet respondents indicated that less than 20% of transmitted instructions to the intermediary contained a specific price, volume or benchmark objective, making transaction cost measurement potentially more difficult,” notes the study.
“Lack of consensus on how to comply with Article 21 and likely insufficient infrastructure and methods to support the best execution process may result in a perverse outcome for the investor,” adds Giraud.