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But how can you achieve this in a
practical way?
Process from policy
The overarching theme presented
from buy- and sell-side participants
is that outlining and applying an
appropriate process that works for
your company and the instruments
you trade is key.
Senior regulatory adviser at
Fidessa, Christian Voigt, asserted
that best execution “will never be a
simple box ticking process, but it is
a continuous policy”.
The whole process of best execu-
tion starts with the best execution
policy and this is all about being
able to demonstrate a process that
supports the policy.
Mark Northwood, former global
head of equity trading at Fidelity
International and founder of Bips
Global, added that hypothetically,
firms would need knowledge and
control of what every other market
participant is doing, “which would
be an amazing, illegal hack!”
However he adds, “a process with
the ‘sufficient steps’ thoughtfully
developed around your particular
type of trading activity certainly is
[achievable].”
KCG’s Seigne echoes this: “It’s
clear from regulatory authorities
that you need to set up a process
and it’s not just about getting a
single price. Are you applying your
best execution process and are you
adhering to giving your client the
best outcome you can get?”
The key is to establish a systemat-
ic, disciplined approach to trading
that leverages statistical analysis of
execution quality of various trading
methods, Richter at IHS Markit
explains.
“All of these processes should
also be outlined in an up to date
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best execution policy that all in-
vestment firms will need to provide
to their regulator,” he adds.
This requires data… a lot of data.
Almost every market participant
The TRADE spoke with about the
issue of best execution discussed
the importance of data when trying
to apply a best execution process.
In fact, data has been named on
many occasions as the biggest
problem for the buy- and sell-side
ahead of MiFID II.
Lessons learnt
“Managing the trade off between
obtaining more information about
the current market, and the signal-
ling that comes from doing so, be it
responding to IOIs and axes, send-
ing RFQ’s or starting to trade,” is a
major challenge, adds Northwood.
IHS Markit’s Richter agrees,
stating that obtaining “good quality
data enables firms to evaluate
orders on a pre- and post-trade
basis as well as at the point of trad-
ing,” confronts those seeking best
execution.
For the buy-side in particular,
reporting responsibility and data
collection hasn’t always been at the
forefront.
At The TRADE’s MiFID II:
Best Execution event in Paris this
October, Rachel Hutchins, who
is part of the trading solutions,
compliance and regulation team at
Bloomberg, explained to delegates
that the buy-side had no such
requirements under MiFID I.
“The sell-side learnt a lot things
from reporting under MiFID I.
They have learnt from their mis-
takes and have been fined for those
mistakes,” she explained.
“The buy-side are doing this for
the first time and they have a lot to
learn.”
Liquidnet’s head of EMEA, Mark
Pumfrey, echoes Hutchins when he
explains that in the past the buy-
side has “historically handed most
of the responsibility to achieve best
execution to their brokers. How-
ever, this responsibility has now
moved to the buy-side.”
This is where technology steps in.
Pumfrey tells The TRADE that
technology is the key to data
collection and it is crucial that par-
ticipants collect the correct data to
be able to assess the results, a view
echoed by many others.
He adds that through OMS, EMS
and external vendors, participants
can look back through transactions
to assess why certain routes were
chosen at the time.
Northwood highlights two ques-
tions when asked if technology was
the key to unlocking best execution
and said the telephone alone does
not constitute an arrangement of
‘sufficient steps’.
Firstly, does a firm require tech-
nology or can it make better use of
what it already has? Secondly, what
is the best working combination of
smart people a firm has with the
technology available?
“As many have noted, technology
is good at speed, correlating data
and consistent decisions. A good
trader is curious about causation,
interprets and adapts as market
information changes,” he says.
“Of course cognitive computing,
applying machine learning tech-
niques, is also pushing further into
the domain of human traders.”
IHS Markit’s Richter stated that
technology is a “major tool” to
assist firms with building process-
es for best execution, but also for
other elements of the policy like
understanding smart order routers,
trading venue performance and
algorithmic behaviours.