Buy-side firms should be wary of overusing requests for quote (RFQs) to evidence their best execution once MiFID II comes into force on 3 January 2018, according to a panel of experts.
Speaking at The TRADE’s MiFID II Checklist conference in London today, panellists said that while RFQs could offer good proof of best execution, there is a risk they will be overused by firms attempting to play it safe in the early days of MiFID II.
Julie Beecher, an independent buy-side consultant, told the conference’s best execution session: “RFQs make it easier to evidence best execution but they also make a lot of noise and risk moving the market.”
Fabien Oreve, global head of trading at Candriam Investors, agreed, adding: “RFQ is becoming very popular and is a good development for the industry, but you need to be very careful how you use them because there is a higher level of information leakage. Educating traders on when it is appropriate to use an RFQ will be important.”
The panel believe that, immediately after MiFID II is introduced there could be a spike in RFQ usage by firms taking a cautious approach to compliance, but hope it will come down as firms realise that information leakage is acting against their goals to achieve best execution.
Risk trading was also raised, with the panel saying that any firm that only trades on risk could fall foul of regulators.
Ben Stephens, head of business development at Instinet Europe, said: “You always need to ask if it is better at this time to trade on risk instead of in the market. Each counterparty has something to offer and if a risk trade offers you a better price at the time than you can get in the lit market then you absolutely should be trading on risk in that situation.”
Alasdair Haynes, CEO of Aquis Exchange, added: “Risk is absolutely critical in every market but you should never use it for every trade. Providers should give their clients access to as many liquidity pools as they can, but we also need to recognise it is impractical to tap into every pool with an expected 50 systematic internalisers in the market next year.
One panellist also warned that the industry needs to consider carefully how it applies transaction cost analysis (TCA) to non-equity asset classes as a way of achieving best execution.
Beecher explained: “Fixed income needs to take a different route to equities, with more innovation. TCA happened in the equity world and the equity approach to execution changed to fit it, I don’t think it would be appropriate for that to happen in fixed income, it needs its own unique approach.”
Oreve said that as more data becomes available under MiFID II the fixed income market will be able to improve its execution quality, but acknowledged that it faces its own unique challenges.
“Fixed income TCA can be very time consuming for stakeholders, what we need is for asset managers to develop new TCA partnerships that will look at a broader set of solutions to support multi-asset class trading.”