ASSET MANAGERS ARE NOT READY FOR MIFID II BEST EXECUTION RULES.
The clock may be ticking ever closer to the MiFID II January 2018 deadline but only 6% of asset managers are ready to meet the best execution requirements while 61% recognise their need to provide more granular detail to their policies, according to a new study – “Re-Engineering Best Execution” by Liquidnet.
Canvassing 55 heads of trading and dealing at firms in North America and Europe, the study found that a third are planning to make changes to trading workflow due to the increase in information required while over a quarter are specifically investing in technology to ensure a more systematic approach to best execution.
Rebecca Healey, head of EMEA market structure for Liquidnet, says, “The direction of travel the industry needs to take is well and truly unbundled.”
MiFID II is also forcing firms to rethink their best execution methods with 89% acknowledging a significantly different approach is needed. However, over a third of respondents have more work to do to implement a firm-wide execution process.
“Best execution 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 lifecycle of a trade”, says Healey.
The study also showed that asset managers are moving away from the traditional measure of transaction cost analysis “towards more holistic best-execution analysis” to better understand larger orders and to better analyse bespoke “high-touch” and fixed-income trading.
However, Healey notes that there are challenges in the fixed income TCA arena such as the dearth of pricing data. “Traders know what is available in equities, but feel frustrated that they don’t have the same level of reliable, transparent data in fixed income,” she says.
The rise of multi-asset trading has also added another wrinkle to the TCA process, driving trading desks towards a more value-added proprietary model.
Liquidnet forecasts that the shift towards more holistic best execution analysis, inclusive of TCA, will continue across all asset classes and types of trading. It believes that as MiFID II firms collect more data internally and externally about execution of trades, progress will follow.
Healey explains, “Overall the process of meeting best execution standards, although a significant challenge in many areas, will see firms ending up with access to greater information on how to better enhance the best execution process”.
Asset managers are also assessing their relationships in this changing trading environment. Around 70% are reviewing their traditional broker relationships while a third of respondents plan to adjust their broker lists before January.
Moreover, over 65% said they will no longer solely rely on a broker when deciding where to trade and will select a small and mid-cap player if they can provide a unique offering.