Regulatory Evolution
The interpretation of MiFID is a much vaunted phrase, but it’s worth bearing in mind a number of points when considering, what is “Best Execution” and indeed whether all brokers can be the “Best” when clearly there are differences in approach!
Figure 3 shows the key “Best Execution”principles that are important to understand the intentions of MiFID and to understand any comparisons with Reg NMS as well. They clearly show the impact of principle-based regulation (MiFID) versus rules-based regulation (Reg NMS):
The following phrases have been taken from the explicit MiFID guidelines on broker requirements to achieve Best Execution. Brokers must:
- Take all reasonable steps……but it is not an absolute obligation
- ….on a consistent basis……but not on a trade by trade basis
- ….client instructions must be followed……this impacts broker obligation for best ex
- ….in accordance with a firm’s best execution policy……not all possible execution venues need to be considered
So how does a client gain an understanding of whether their broker is providing “Best Execution?” It might not be easy given some of the data limitations already mentioned, but quality, independent TCA (Transaction Cost Analysis) is key. Whilst brokers are well positioned to provide a wealth of data on trades executed with them directly, the client challenge is to reconcile this across not just providers, but across different execution channels as well.
Dark pools in Europe
A subject area that receives a more significant share of media attention than market turnover – as shown earlier – but nonetheless is a fast moving segment of European structure that can’t be ignored.
Dark pools in Europe can currently be split into the following categories:
