MIFID II: THE RISE OF ANALYTICS.
Adam De Rose, Associate Director, Product Management, Eze Software Group.
I was an equities dealer on the buyside for a short while, some seven years ago, I thought I knew what I was doing. I watched the bids and the offers in the order book closely, hoping I could learn to read them like Keanu Reeves could read the Matrix. I watched out for news on the names I was trading and any others of interest to my portfolio managers, and I had screens full of charts and morning reports from brokers and watch lists and chat rooms and alerts and even a system built by my talented colleague that would calculate intraday P&L and bark whenever a stop-loss was hit and we needed to exit. We called it Watchdog.
Every day I digested as much information as I could, and I ingested at least seven cups of coffee as I did it. I tried to be the best trader I could be, and best execution was always front and centre in my mind. And all that was great, but I returned home every day mentally exhausted from the sheer, monumental effort of trying to be everywhere at once.
Seven years on, at the cusp of MIFID II implementation and with the higher and wider standards of best execution it demands, I find myself casting my mind back and wondering whether, even with all that effort, I would have fallen short of the new obligations.
As we all know, the regulators’ focus is on ensuring firms have a process in place to take “all sufficient steps” to achieve the best possible outcome for investors. The latest statement* from the Financial Conduct Authority on 3 March 2017 seems to indicate that while some firms have put in place effective governance processes to tackle costs throughout the trade life-cycle, many others are still ‘ticking the box’ on using transaction cost data. The industry has some way to go on embracing technology, and the FCA expects firms to “be aware of enhancements to best execution monitoring as they become available.”
The scope of MiFID II is a formidable challenge for the industry, but rather than stifle progress, the regulators’ challenge has spurred innovation. We are seeing exciting new technologies coming online across the industry, and much collaboration between multiple parts of the asset management technology ecosystem to enable the buyside to demonstrably improve their best execution processes. These are the very enhancements to best execution monitoring that the FCA expects the buyside to stay on top of.
For our part, we’re seeing many on the buyside making the effort, embracing education and incorporating oversight and insightful monitoring throughout their investment process. At the same time, we’re doing our very best to survey the landscape and bring the best of the tools we find to support our clients.
For instance, Eze Software has recently partnered with OTAS Technologies. OTAS apps like Alerts and Intraday Screener can monitor your order blotter and draw your attention to abnormalities that could indicate a change to your execution strategy may be needed. The integrated Schedule app runs pre-trade transaction cost analysis that explains the risk profile of your order and calculates the optimum trading schedule based on your risk appetite. We’ve seamlessly integrated these advanced in-trade analytics and more with our trading tools, enabling traders to quickly react to market signals.
We’re also turning our attention to the market’s interest in intelligent segmentation of orders, lining up trade objectives with appropriate benchmarks and looking at how we can use the client’s universe of post-trade evidence to drive decisions throughout this process, either automatically or as an advisory function. Despite what you may have read, this isn’t artificial intelligence, this is just trading intelligence.
Say what you like, as a mere human being, you can’t watch 50 order books at the same time, and you can’t pay close attention to the performance of each order and the conditions in which they’re trading. You certainly can’t give each and every order the due care and attention that MiFID II demands. Not even Keanu could do that.
So what can you do?
First, review your process. Take a good hard look at your best execution policy and make sure it accurately depicts the factors that your firm takes into account when deciding execution tactics. Review the best execution policies of your brokers as well – you may wish to use one of the electronic trading questionnaires out there to help you collect and digest the data. Then think about how to show that you are educating everyone involved in orders about the policy, how can you prove you’re following it, and put in place a framework for regularly reviewing your performance.
Underpinning much of the above is data. Look around the market to evaluate what technology and reporting tools are out there and try to identify which of them would best help you justify what you say you’re doing in your best ex policy, and will provide the most insightful look into your trading.
Best execution is not an end-state. It is an endeavour. It is a mindset to be adopted throughout the entire life-cycle of a trade, including before and during, when you can exploit real-time market intelligence to impact your results. The traditional end-state, in the form of post-trade transaction cost analysis, has repositioned itself instead as a critical part of the feedback loop, reflecting a mindset that we can learn, refine, and ultimately do better. This analytical mindset, I would argue strongly, is where the regulators are trying to direct us.