With less than four months to go before Europe’s MiFID II rules kick in, the vast majority of fund managers aren’t prepared to meet its so-called best execution requirements — obligations that require firms to demonstrate that they’re getting the optimal deal for clients.
A survey during April and May by dark pool operator Liquidnet Holdings Inc. found that just 6 percent of asset managers say they are ready to comply. About 61 percent said they’ll need to provide more granular detail to their best-execution policies, according to the results of 55 interviews with heads of trading and dealing at firms in North America and Europe.
Best execution rules are intended to lead to more transparency and competition, which could drive down trading fees. And it’s not just in Europe. Clients worldwide are requesting more detailed evidence of both pre- and post-trade best execution before the revised Markets in Financial Instruments Directive kicks in, the company said.
“Best execution no longer means a mere ‘look back and check’ on the outcome of an individual order,” said Rebecca Healey, Head of EMEA Market Structure for Liquidnet. “It is now the creation and implementation of a process that enables the trader to be in possession of as much valuable information as possible, throughout the life cycle of a trade.”
A third of participants in the survey said they are planning to make changes to trading work flow, while more than a quarter are specifically investing in technology to ensure a more systematic approach to best execution, Liquidnet said.
“Firms now have to hit the reset button to ensure they meet the higher regulatory standards required,” Healey said in the report.
Asset managers have traditionally measured best execution with a method called transaction cost analysis, but Liquidnet found that the industry has begun to see a shift “towards more holistic best-execution analysis” to better understand larger orders and to better analyze bespoke “high-touch” and fixed-income trading, the report said.
Bloomberg LP, the parent of Bloomberg News, provides transparency and transaction reporting and best-execution services for firms complying with MiFID II requirements.
Among other highlights of the report:
- 70 percent of asset managers are reviewing their traditional broker relationships. The execution landscape looks set for further change as a third of survey respondents plan to adjust their broker lists before January.
- Access to liquidity remains the No. 1 requirement from 69 percent of respondents in selecting execution partners, “but how firms choose to access liquidity is diverging as unbundling demands a strategic rethink of which brokers to engage with, as well as where to trade”
- 64 percent said they have a strategy for improving client outcomes, but more than a third of respondents said they have more to do to move policies from a best-efforts and informal process to a firm-wide systematic execution process.