Vicky Sanders Follow Co-founder, RSRCHXchange

 

At a research unbundling conference in London this week the audience listened intently to the opening address by the regulator from the FCA. In amongst the usual commentary, the clarifying of misunderstandings and the closing of loopholes, there was something else…he raised best execution…. at a research unbundling conference.

Often forgotten alongside the other impacts of MiFID II, best execution is no less important but often far less well understood and with many parallels to the unbundling of research.

 

Reasonable vs Sufficient: Does It Matter?

That change of a single word has wide ranging implications for the buy side. With it comes an operational workload that may push the regulatory burden so high that the day of the hybrid PM/Trader becomes a thing of the past in Europe.

ESMA lays out these differences in its Q&A document here.

Having watched MiFID II unfold over the last five or so years I have seen waves of interest in the different aspects of the regulation – last year and early this year it was transaction reporting; lately it has been research but you may be forgiven for not having appreciated the nuances around reasonable and sufficient when it comes to best execution.

For the firms with established execution desks this, like much of MiFID II, is just turning up the volume on things they already do: transaction cost analysis and market impact need to be examined in more detail and price discovery and choice of venue become more important issues. But for many others, the regulatory requirements could be so burdensome that existing working practices may have to be reappraised.

Without the robust records and processes required for best execution the risk of non-compliance and enforcement has to be quite high. There is very little ambiguity in this section of regulation.

 

Hold on if this is such a dramatic change why haven’t I heard about it?

RSRCHX operates a research marketplace and a solution for the research unbundling part of MiFID II. Over the past three years we have seen varying degrees of interest (or lack of interest) in how we can help the buy side – stages often known as the five stages of grief. For a long period of time we had denial – that any change would happen, that the regulator would be toothless, that research would still be given away for free, that there would be a fudge and everything would be fine to carry on just the way we were. To some extent I still hear those arguments today. But a lot less than I used to. And I don’t hear them from many bigger investment firms or from bigger providers of research. For those firms they have now reached the acceptance stage.

In fact I was in a meeting in the US recently where someone stopped me mid flow and said ‘look MiFID II has happened. How do we move on? How do we win and carry on making money?’.

Like fake news it is hard to debunk the arguments of the denial camp and this is such a wide-sweeping piece of regulation that policing every aspect on day 1 is going to be very tough, but regulators are aware that words alone will just mean participants push the boundary until they are forced to enforce.

 

So how do I evidence best execution to clients and the regulator?

It cannot be the intention of regulation to drive small firms out of business. In the research area, firms like RSRCHX with flexible models of research procurement aim to give those with a smaller budget a way in which to still access high quality research and derive alpha. And outsourced solutions like this can also help smaller firms deal with the regulatory burden of best execution.

Outsourcing execution means firms can benefit from the scale of an experienced trading desk with improved liquidity and information, leveraging analysis of market impact & emerging venues, without draining their own resources.

Firms like CF Global execute via an extensive global counterparty network and multiple electronic destinations, acting as a full dealing desk for funds that need to maintain access to liquidity, control costs and address regulatory obligations. Bonus: the company doesn’t provide research and has no prop book, which helps funds demonstrate they’re removing potential conflict of interest between trading and research.

At the moment, unbundling means many funds are cutting lists and will evaluate trading partners based entirely on quality of execution. Still, others are exploring a broader question:

“Do we have the expertise in-house to create, implement, monitor and correct our own best execution process and policy which lets us evidence best execution to client and regulator, consistently and over time? The regulation suggests this is necessary.

With regulatory costs rising and demands on buy side firms increasing, this has led some firms to conclude they are investment managers and not traders.

RSRCHXchange is the purpose-built MiFID II aggregator and marketplace for institutional research. The RSRCHX platform enables asset management firms to read, purchase and monitor research services from banks, brokers & boutique providers in a more efficient and transparent way. It is a one-stop-shop for consuming research in compliance with MiFID II and accessing the newly evolving paid-for research market.

CF Global Trading offers a bespoke equity trading solution for institutional clients via live dealing desks in Hong Kong, London, and New York, acting as a buy-side trading partner for investment, pension, and hedge funds trading in every time zone. The firm’s ‘one-to-many’ architecture means access to multiple liquidity channels with a single agreement: execution of client orders via more than 200 brokers, 50+ electronic destinations and a host of broker algorithms & crossing networks. CF Global also evaluate venues, brokers and algorithms with broker-neutral transaction cost analysis from LiquidMetrix to support clients’ requirement to prove best execution.