The Market Abuse Regulation (MAR) requires all investment firms to monitor their trading activities in order to detect potential market abuse. Unless the trading is performed in a manual manner in low frequency, this detection should be carried out automatically. Even though the detection is performed automatically all detected breaches should be investigated by a human being. The investigation also falls under the record keeping requirement, which implicates the use of a case management system.
Investment firms need to take their clients' best interest into consideration. They should be able to motivate their actions and provide details from their records up to five years after the events. A policy must be in place, which needs to be based on facts and must be reviewed yearly.
Best execution RTS 27 reporting requires market participants or trading venues to report statistics around order, trading and quoting activities for the previous quarter. In general, an investment firm is not covered by the best execution RTS 27 reporting since this regulation include trading venues, systematic internalisers, market makers and other liquidity providers.
If an investment firm in any way handles client orders or money they should provide an annual summary of the top five venues on which their client orders have been executed. They need to provide yearly summaries of the top five trading venues used, aggregated per customer classification and asset class category. This part of the regulation does not apply if only trading the firm’s own capital.
Even if an investment firm doesn't consider itself a market maker, its activities may be deemed market making if they are sending two-way quotes or orders to a market and exceeding certain levels. If an investment firm is classified as a market maker they need to sign an agreement with the trading venue. Once that agreement is signed they need to monitor that they are fulfilling the obligations.
All investment firms that use automated strategies on how, where and when to route orders are considered to perform algorithmic trading. As such, this activity needs to be monitored in order to detect disorderly trading.
Follow up best execution policies and compile facts in order to evaluate, monitor and review the policy. Transaction Cost Analysis can help to evaluate execution performance, and can be used as a tool to improve the firm’s best execution policies.
Internalisation or client facilitation can be done in a systematic or non-systematic fashion. Having an infrastructure in place to bring structure to the internalisation, including price requests that don’t reach a transaction, is beneficial to capture record-keeping data and to automate post-trade transparency compliance. If a firm decides to register as being systematic, a pre-trade transparency module can be added to fully comply with the SI regime. A firm that crosses the levels for becoming an SI needs to comply with the SI regime within three months, so having the basic infrastructure allows for an easy upgrade to scale up within the required time frame.
The best execution policies should be based on facts, and since statistics show that very large proportions of the total values traded are now done outside of the primary markets it will be increasingly important to make sure the relevant MTFs can be accessed when trading client orders. To achieve the best possible execution results when accessing multiple venues, a SOR can automate decisions in line with the best execution policy.
With best execution policies now having to be followed in sufficient steps, using a SOR to automate the best execution enforcement allows users to focus on more relevant tasks than selecting the most favourable venue for a particular order.
Although common sense to many, the regulation clarifies that giving naked access to a venue though a firm’s membership should not be done. Pre-trade limits are an efficient way to allow customers to trade while controlling exposure in real time.