Europe’s buy-side calls for tougher best execution enforcement

Institutional investment firms have welcomed proposals in MiFID II to bolster best execution, but admit that more most be done to hold the sell-side to account on execution performance.
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Institutional investment firms have welcomed proposals in MiFID II to bolster best execution, but admit that more most be done to hold the sell-side to account on execution performance.

In its MiFID II proposals unveiled last week, the European Commission (EC) recommended that brokers publicly list the top five trading venues for each class of financial instrument used for executing client orders on an annual basis. Furthermore, trading venues will be required to publish annual data relating to execution quality, which the EC says may include the number orders that are cancelled and the speed of execution.

According to the EC, this would improve information provided on best execution policies that are often “generic and standard and do not allow clients to understand how an order will be executed”.

While he agrees that best execution policies in their current form are generic, Martin Ekers, head of dealing at Northern Trust Global Investments in London, believes the new proposals will only be of marginal benefit.

“If the largest investment banks published their top five venues, you would expect the results to be broadly similar, so it opens up another area for us to question the sell-side if there are any significant outliers,” he told “However, this information is already available to those buy-side firms that request it through FIX tag 30.”

Tag 30 identifies the venue of execution on FIX-based electronic messages sent back to institutional investors by brokers on completion of orders.

Guy Sears, director of wholesale at UK-based trade body the Investment Management Association, said that a more pressing matter is ensuring that brokers are held accountable for best execution failings. “We don’t necessarily need to change the rules related to best execution, some of them simply require enforcement,” he said.

In 2007, MiFID introduced a principles-based approach to best execution that obliges brokers to execute orders “on terms that are most favourable to the client”, including – but not limited to – the price of stocks. Brokers are also required to present their best execution policies to their buy-side clients.

Under MiFID II, greater clarity on the performance of execution venues and how they are used by brokers will be supported by a framework proposed for establishing a consolidated source of post-trade data.

The EC proposes that market data vendors will be able to establish a consolidated tape solutions based on data delivered via new entities called approved publication arrangements (APAs), which would be responsible for cleaning and normalising data for consolidation to a set of pre-defined standards.

Ekers is supportive of the APA regime, noting that, “one of the biggest inhibitors to a consolidated tape is the lack of quality data and consistency of condition flags between execution venues”.

APAs are intended to disseminate data in a way that facilitates consolidation of information with similar data from other sources. Pan-European securities watchdog the European Securities and Markets Authority will be responsible for drafting technical standards relating to common data formats and standards.

While in theory the APA regime should create a solid basis for the creation of a consolidated tape, some suggest that the slowness to date of the industry to find a market-led solution should not be discounted.

“There may be an argument for giving the EC the power to intervene and create a mandatory consolidated tape should their proposed approach not work,” said Sears.