Some trading teams are beginning to look beyond the regulatory compliance requirements for best execution. How can data and analytics be used to better understand the business and its competitive environment to deliver real value?
- To comply with best execution regulatory requirements, trading teams are increasingly using transaction cost analysis.
- A Refinitiv survey highlights that 73 percent of traders believe that execution management systems will be either very or somewhat impactful on institutional financial markets over the next three-to-five years.
- Over the medium-term, execution analytics will evolve as a field, bringing AI and traders together to produce even more insights.
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Although best execution is a regulatory requirement in many jurisdictions, many financial services firms are finding that taking a more strategic approach to the data and analytics needed for compliance can lay the groundwork for generating significant business value.
In fact, a recent Refinitiv survey says that 65 percent of respondents believe that market structure knowledge will be an important trading desk skill over the next three-to-five years.
Another Refinitiv survey highlights that 73 percent of traders believe that execution management systems will be either very or somewhat impactful on institutional financial markets over the next three-to-five years. In the same survey, 78 percent of traders believe the same is true for trade performance analytics.
A new white paper from Refinitiv discusses how trading teams are engaging in digital transformation to address challenges in building and backtesting trading strategies, regulatory change, and innovation.
This blog will explore a fourth topic in the white paper — the business benefits of a strategic approach to best execution analytics.
Trusted data is essential for all analytics within a firm’s digital transformation program. Thinking more strategically about how data and analytics are sourced and used can open doors to improve efficiencies, generate understanding about customers, or to spot market opportunities.
Getting the basics of best execution right
Jurisdictions have different rules for best execution. For example, under the EU’s Markets in Financial Instruments Directive II (MiFID II), firms are required to prove best execution of trade transactions across a wide range of different types of securities and instruments.
To comply, firms are increasingly adopting transaction cost analysis (TCA), an analytic approach that compares a trade against various benchmarks to better understand the strength of that trade’s execution.
Working with trusted data is essential for compliance with MiFID II’s best execution requirements through the use of TCA. For example, establishing best execution for less-liquid instruments requires the trading team to obtain either a market price or a synthetic price to work with, from an evaluated pricing service.
Having the right price can mean the difference between being compliant, and being non-compliant.
It’s also essential to have access to accurate historical and real-time tick data in place. To get best execution right under MiFID II, trading teams need data from a wide range of asset classes, across multiple geographies. A single equity could be traded on exchanges around the globe. All of this data needs to be onboarded, aggregated and normalized, using standardized identifiers. Accurate time stamps are very important as well.
Once trusted pricing data is in place for best execution compliance, trading teams can move on to thinking strategically about how that same data can fuel business-driven analytics.
Many trading teams are already beginning to do this, by performing pre-trade TCA, identifying execution slippage through TCA, and using data generated by RTS 27 and 28 reporting to better understand the competitive landscape.
Being able to supply regulators with proof of best execution is just the beginning for trading teams.
When considered within an overall digital transformation strategy, trusted data, coupled with best execution analytics have the power to increase efficiencies, improve profits, enhance transparency around counterparties, and boost client relationships.
Looking to the future
While best execution in the U.S. is mostly focused on comparing a traded price against the consolidated tape, best execution under MiFID II has a broader range of ingredients to consider.
This package of considerations was designed by the EU to more accurately reflect the reality of best execution from the perspectives of trading teams and their clients. Although the EU is considering putting a consolidated tape in place, the jurisdiction’s multi-faceted approach to best execution is likely to remain in place.
Over time, for both regulatory and business reasons, other data sets besides pricing will be brought into both pre- and post-trade execution analytics, including alternative data. This additional information, transformed by analytics, will give traders more context for the conditions under which they are executing a trade, as well as potential competitive insights.
For example, Project Mosaic — developed by Refinitiv Labs — detects and explains price moves in real time for equities, using pricing and market data, news information, and events data. Through its AI-based approach, Project Mosaic could potentially enrich TCA by providing traders with a richer perspective on the circumstances surrounding a trade.
Watch: Expert Interview — How Tick History in GCP enables innovation
In fact, bringing traders together with enhanced best execution data and analytics is going to be a significant trend over the next few years.
A recent poll found that use of tick history data for execution strategy and back-testing tops up the list for where tick data adds the greatest value, with 40.5 percent of respondents saying this.
Moreover, the opportunities for people with the right skill sets — who can combine talents for trading and analysis to generate actionable best execution insights — looks set to blossom. Over the medium term, best execution analytics looks like an exciting, evolving field that will shift its focus from ensuring compliance to delivering business insight.