HE best execution requirements of the Markets in Financial Instruments Directive (Mifid) review begin to take a more solid form, it is important to take a look at what best execution means for institutional and retail clients – not just in terms of regulatory compliance, but also as a means to get ahead in a competitive market place. In many cases, if you are not looking to improve best execution and execution quality, you are liable to be left behind.
MIND THE QUALITY
So what is best execution? Broadly, it can be taken as an obligation to provide the best possible quality of trade for all clients in all situations – there is an asymmetry of information between buy-side and sell-side and those who take an order and those who execute an order. Best execution is an obligation not to take advantage of this asymmetry.
Buy-side best execution is more focused on whether the order was executed and whether it was done so at the best price, whereas on the sell-side, it is low latency and access to liquidity that is essential to achieving this requirement.
According to Fred Ponzo, the push for best execution will affect the buy-side in three broad groups: large corporates, small corporates and retail investors.
“The regulations on best execution will have a large bearing on large corporations – typically those with five or more treasury departments,” says Ponzo. “They will fall into the same category as the institutions – meaning they will have to be taken care of much better by the brokers than they have been in the past – making sure the bank’s price is good enough.”
For the smaller corporates, the regulations are not yet clear as to how they will be treated and which side of the line they will fall on – will they be treated in the same way as retail clients or the larger corporates? These are not volume or large size trades, but would probably stand to gain the most from improved execution.
For retail investors, things don’t change much, however they will stand to benefit from increased competition for independent brokers. Though the man on the street – buying euros for a house in France – will not benefit from improved execution directly. However, with greater mandated visibility, they will get a bid and an ask price that is closer to the best price than they would usually have done.
The provision of best execution should not be seen as simply an exercise in regulatory compliance, but as a value added offering. As a GreySpark Partners survey points out, on the sell-side 69 per cent of companies target their efforts around best execution to satisfy expectations from their clients. As a pay-off, they sustain client trust and stay competitive in a cut-throat market. But there is nothing to be gained in terms of marketability to clients without a way to prove this quality. But as yet, Ponzo says that there has not been a big move on the part of the big banks to push best execution of FX trades as part of their value added service: “The big banks are not marketing this at all,” says Ponzo. “All their expenditure is going on pushing improved platforms and services to differentiate themselves.” However, as the banks reach a limit of what can be pushed on this front, they are going to look at best execution. “All the banks are going to have to turn to the quality of their execution,” says Ponzo. As always, the market will punish those that do not keep up.