Best execution post-RTS 27: Building consensus in the industry

The removal of RTS 27 execution reports does not negate the importance of best execution, and with the expected regulatory divergence between the UK and EU markets, greater collaboration among market participants to agree on standards is of paramount importance.

With greater divergence between EU and UK regulators post-Brexit, standards that are the result of collaboration between market participants have never been more important. FIX Protocol’s Tag 851 is one such standard, that continues to evolve in response to market needs for best execution.

To the relief of most industry participants, the European Commission’s review of MiFIR in November 2021 included a proposal to remove the complex RTS 27 reports trading venues are required to publish on a quarterly basis.

The UK Financial Conduct Authority also announced the immediate removal of both RTS 27 and RTS 28 reports at the beginning of December. The regulatory rationale is that these reports are rarely downloaded, making the content of limited value in analysing and comparing executions.

However, the removal of RTS 27 execution reports does not negate the importance of best execution, nor the need for better quality data to make informed decisions about where, when, how and with whom to trade.

While most buy-side firms receive trade execution data directly from their brokers today, the lack of standardisation also makes any comparison between brokers’ executions difficult, if not impossible. With the consolidated tape firmly on the regulatory agenda, the industry now has the opportunity to refocus on the data standards necessary to ensure the tape is one of value.

The FIX Equity Business Practices Working Group recently conducted a survey on the use of FIX Tag 851, which is used to understand how a trade is taking place by describing the final destination point of an execution, the capacity in which the broker is executing, as well as the nature of liquidity. Out of 117 responses, 88% indicated Tag 851 was either somewhat, very or extremely important to their execution process.

“We regularly monitor the data on our fills and follow up with brokers who are not sending tag 851 and ask them to send it to us. We have never reached 100% compliance, but we continually push for it” said one buy-side respondent.

Clear and widely adopted standards are fundamental to the well-functioning of capital markets and this is where the work of the different FIX Working Groups can help to ensure relevant tags are in place and work for most market participants. The information obtained from Tag 851 is analysed, which contributes to the best-execution process. Greater accuracy and transparency over standards will enable better collaboration between the buy-side and sell-side to improve execution performance.

“Our clients need access to the execution transparency information, and they need to receive it in a consistent way that is not specific to an individual broker’s interpretation,” says Irina Sonich-Bright, co-chair of the EMEA Business Practices Working Group at FIX Trading and head of execution services product management at Credit Suisse.

“FIX trading is doing great work on building an industry consensus around best practices of what information is required and how it should be normalised across the whole trade delivery chain – from the execution source, through the broker chain and to the end buy-side destination.”

Respondents to the FIX survey did have suggestions on how to improve the use of Tag 851; 54% highlighted inconsistencies in how brokers use the tag, and 17% stated the need for more accurate descriptions of how the tag is used. Some respondents also requested additional information on the

source of liquidity – SIs, ELPs, dark, lit, agency or facilitation. The level of response to the review launched by FIX highlighted the level of detail now deemed necessary to understand the full picture of a trade.

“Tag 851 is brilliant,” according to a buy-side survey respondent. What could be added is a standardised tag indicating SI fills and what type of fill it is. We see a lot of inconsistency here if it is “risk”, “derivative unwind” or other parts of the CRB liquidity.”

There is now a need for greater industry-wide standards that can be implemented -from collaboration among market participants whether they sit on the buy or sell-side, venue or vendor side.

With the expected regulatory divergence between the UK and EU markets, greater collaboration among market participants to agree on standards is of paramount importance as a means of ensuring best execution is safeguarded as markets become more fragmented.

“Execution transparency continues to be an important focus for the buy-side and the use of the FIX protocol standards helps to ensure that the information needed by the industry is clear and unambiguous,” said Maria Netley, EMEA Regional Director at FIX Trading Community. “As markets adapt, the FIX protocol continues to evolve to meet the needs of the market.”