A new paper from UK buy-side trade body the Investment Management Association (IMA) says the unreliability of post-trade data is compromising the ability of asset managers to achieve or demonstrate best execution.
Drawing on member interviews, the IMA’s Execution Quality Survey concludes that transaction cost analysis is currently not accurate enough to evidence best execution because post-trade data from execution venues is fragmented and delayed.
“Firms know they have to come up with a market-based solution for fragmented data, but the very thing that MiFID wanted makes evidencing best execution very difficult,” Guy Sears, director of wholesale, IMA, told theTRADEnews.com. “The opening up of market competition – while only having brief lines in the regulation about how to manage data – just didn’t go far enough.”
Although some firms, such as Equiduct and Neonet have European consolidated tape products, Sears believes traders need time to adapt, particularly given recent market conditions. “Some consolidated tape products are untested and people may be sticking to what they know in a crisis,” said Sears. “For all the innovation that goes on in the financial markets, we are also very conservative at times. However, MiFID is only a year in, so if we get to this point next year and things are the same, you then have to start asking questions.”
Many survey participants also agreed that the requirement to monitor execution venues should rest with the brokers and venues themselves, rather than the buy-side.
MiFID currently requires buy-side firms to prove best execution to their clients. However, as buy-side firms are not exchange members, they may not be in the the bets position to evaluate this, and there is some concern that brokers may be accessing venues that are cheapest for them rather than being the most suitable for the client. To this end, respondents said that an onward routing rule, similar to the one introduced by Reg NMS in the US, would help with the provision of best execution.
“Firms are realising that regulation needs to go a bit further than MiFID did in encouraging competition for orders,” said Sears. “MiFID is trying to build a single market across Europe, but people need to acknowledge that this is a market with 500 million people and a GDP that is actually 20% bigger than the US. An onward routing rule would be beneficial for getting the best results for end-clients here in the same way it is in the US.”
The report also noted that settlement certainty and counterparty risk are now the most important best execution goals, following the collapse of global investment bank Lehman Brothers. However, Sears noted that the focus would again return to price and likelihood of execution in the longer term.