Best execution under MiFID II is a holdover from its predecessor, MiFID I, but with two kickers. First, it’s much broader in scope, applying to all asset classes vs. MiFID I’s equities-only focus. Second, and perhaps more onerously, it’s more forceful: iinvestment firms have an obligation to take “all sufficient steps” to execute client orders to ensure the best possible outcome for their customers, compared with MiFID I’s mere “all reasonable steps”.
The definition of best execution remains basically the same: it requires firms to assess number of key factors to determine best execution, among them price, cost, speed and likelihood of execution and settlement, size and nature of orders. But regulators have made it clear they plan to pay more attention to firms’ attempts at compliance, as well customers, will have access to higher quality execution data.
To demonstrate proof of best execution, regulated firms will be required to identify their top five execution venues, in terms of trading volumes, for the preceding year. They will be required to publish a clearly written execution policy accompanied by supporting data. Clients must be notified of any material changes to the policy.
Firms handling client orders will also be required to reconstruct any given trade should regulators require it, and show consistent application of policy across different lines of business, geographical market centres and asset types and classes.
While the direct consequence of MiFID II is a more complex trading landscape, with new venues and enhanced transparency provisions. Yet how that landscape will look, once the dust from MiFID II has settled, remains anyone’s guess: there is still a lot we don’t know about how the marketplace will absorb and adapt to the new regulation.
What is clear, however, is that unforeseen consequences are sparking new innovations in business approaches and supporting technologies. For example, recent months have witnessed the emergence of new execution venues geared toward specific market needs, such as Large-in-Scale (LIS) or conditional order handling, or auction-on-demand venues.
These innovations – and the general shift toward systematic internalisation for liquidity providers – will have a major impact on how investment firms route their orders. SORs will need to take into account far more parameters than they do now, ranging from different routing cycles for RFQs, periodic auctions, LIS venue rules and more.
This changing environment may require ending the traditional demarcation between OMS and EMS platforms, as the complexity of the post-MiFID II execution venue landscape calls less for a discrete system for sending orders to a destination and more for a platform that addresses work flow seamlessly without the need for multiple external applications.
Consolidation of OMS and EMS functionality has been a trend from MiFID I. Many sell-side firms, however, have developed proprietary systems for EMS, or use a third-party execution broker, which means the EMS part of the consolidated systems are not used to their full potential.
In these cases, firms split off the order to the third party (or dedicated in-house) systems and lose some of the benefits of an integrated system. Other firms, meanwhile, took a simpler approach with MiFID I, opting only to integrate OMS and EMS via staging (by use of FIX messages) and drop copies.
These firms now have to catch up and integrate in order to generate the analytics they need to meet the challenge of best execution under MiFID II. This can be achieved at multiple different levels all depending on spending budget.
With MiFID II imminent, many firms expect their existing ISVs to deliver the functionality they require to meet their expanded obligations. It’s unclear, however, how many third-party suppliers are able to meet the new requirements across the board.
What’s needed is a truly integrated approach to OMS and EMS, to meet the need for a work flow platform that takes in a broad range of new functions – SI matching, quote publishing, pre-trade risk gateways, tick database and algo tagging/testing – as well as handling higher-level tasks such as ‘in-flight’ analytics in support of best execution compliance.
Analytics will become increasingly important for those choosing not to take the SOR route to achieving best execution. By integrating analytics at all stages of the trading cycle – pre-, at- and post-trade – practitioners may be able to demonstrate good execution quality without having to implement a SOR.
Execution In March 2018, Itiviti and ULLINK completed a merger to build a global technology force in the capital markets industry. With extensive and complementary expertise, each company brings a unique heritage and product offering to the table that, when combined, create a new world leader in multi-asset trading and financial infrastructure solutions. May 3, 2018
Execution In the final video in this OMS-EMS series, Lars Wiberg, VP Strategic Research Trading and Trade Execution, discusses innovation in the order and execution management and outlines the most pressing challenges facing firms post-MiFID II. Go to Solutions April 4, 2018
Execution This is the second part in a series that explores the past, present and future of Order Management Systems (OMS) and the closely related Execution Management Systems (EMS). We cover these trading tools mainly from a sell-side perspective. As financial markets change, new demands on trading technology appear. This includes the functional requirements of the […] February 27, 2018
Risk & Compliance Jim Northey, Senior Vice President Strategy and Research at Itiviti, explores the topic of regulation in a post-globalization environment. In the wake of Brexit and the US election, are we moving away from unified regulatory equivalence to regulatory arbitrage, with single countries taking advantage of regulatory changes to attract market share? February 5, 2018
By submitting this form, you acknowledge that data collected by us will be handled in accordance with our Privacy Notice.