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The UK ’ s chance to define Europe ’ s best execution blueprint
As the FCA proposes scrapping RTS 27 and RTS 28 requirements , the UK now has a chance to create a reporting regime that better suits the buy-side , writes European market structure analyst at Rosenblatt Securities , Anish Puaar .
With the Financial Conduct
Authority ( FCA ) poised to scrap MiFID II ’ s so-called RTS 27 and 28 reports , the UK has an opportunity to set Europe ’ s gold standard for best execution monitoring . Replacing the MiFID II reports with a standardised set of broker routing metrics , similar to those recently introduced by the US Securities and Exchange Commission ( SEC ), could be a good place to start .
It ’ s no secret that the RTS 27 and 28 reports are unloved by European market participants . The FCA ’ s April 28 consultation paper said they “ have not achieved their policy goal of enhancing investor protection or improving information on execution quality and order routing ” and are barely used by the industry .
TS 27 , produced by venues and systematic internalisers includes details like order book snapshots at arbitrary times of the day . These security-level data take a lot of time and effort to produce but offer little meaningful data . RTS 28 reports require firms to list their top five venues and / or counterparties and are marginally beneficial for keeping an eye on competitors but not for holding brokers to account . Diverging interpretations of the RTS 27 and 28 among European member states compounds their ineffectiveness . It ’ s no surprise that the European Commission also suspended RTS 27 reports until at least February 2023 as part of its recent MiFID II quick fixes .
Getting rid of the RTS 27 and 28 reports entirely would be a welcome move that removes a significant burden for all market participants , but buy-side firms , particularly those that do not have teams on hand to crunch execution data , need an alternative .
One option could be a version of the SEC ’ s snappily titled Rule 606 ( b )( 3 ) reports , which were designed with meaningful industry input and offer buyside firms an actionable dataset that helps them scrutinise their brokers ’ choices . The SEC reports are not a substitute for trade-bytrade transaction cost analysis but can shine a light on suboptimal venue selection in the aggregate .
We ’ ve encountered a number of common issues through the analysis of clients ’ 606 ( b )( 3 ) data uploaded to our buy-side analysis tool , called SORT . These include brokers prioritising their own dark pools over other venues with more liquidity . Often , a broker ’ s captive dark venue will be its top routing destination , with an extremely low fill rate and a high level of crossing the bid-ask spread . This can increase the likelihood of information leakage and price slippage when filling a liquidity-seeking order . Clients seeing such outcomes can ask whether brokers could achieve better results by instead removing liquidity on exchanges or other venues with more liquidity and higher fill rates , and instruct brokers to change their routing behaviour accordingly .
Europe ’ s principles-based approach to best execution , combined with the fragmentation of equity liquidity that has intensified since MiFID II ’ s January 2018 introduction , makes it vital for buy-side firms to identify this type of behaviour and keep their brokers honest .
Anish Puaar , European market structure analyst ,
Rosenblatt Securities
86 // TheTRADE // Summer 2021