Open to Interpretation.
Despite MiFID best execution remains a topic of discussion. Best Execution asks three leading investment firms for their views.
What does ‘best execution’ mean and are expectations being met?
Neil Joseph, Co-chair of EMEA FIX Trading Community and Senior Trader J.P. Morgan Asset Management.
Best execution is the requirement to take all reasonable steps to obtain the best possible result for an investment firm’s client. From our perspective, the requirement to deliver and monitor our attainment of best execution is a fundamental requirement of fiduciary duties owed to our clients. By staying at the forefront of technology and staying abreast of market structure and regulatory changes, we maintain a suite of tools and skills to ensure that our activities when placing a client trade in the marketplace obtains the best possible result. In addition to this we invest significant budget and time into trade analytics to monitor execution.
Rob McGrath, Global Head of Trading, Schroders Investment Management.
For us it is about the processes and pre and post trade procedures that give us confidence that we can source liquidity efficiently. We have all the tools and strong order management and execution management systems and can adjust to current markets conditions. We are also looking how we can improve our execution. However, to me one of the real issues is the lack of a consolidated tape and there was a hope that MiFID II would have addressed this problem.
Michele Patron, Senior Quant Trader at AllianceBernstein.
For a buy side firm, ‘best execution’ is a natural and obvious obligation: given that the price achieved in the market goes directly in the performance of the managed funds, there is a full alignment of interest between fund manager and end client. Starting from this concept, it is clear that execution is an integral part of the alpha production process, and being able to achieve ‘best’ outcome in the execution space goes to the end clients, in the same measure as a good investment decision does. At AllianceBernstein, we have streamlined the evaluation of our execution process in a highly systematic way, to achieve the best possible outcome for our clients.
Has best execution improved since MiFID?
Neil Joseph, JP Morgan The concept of obtaining the best possible result for our clients is a simple one, which is enshrined in FCA principle 6: Customers Interests. The implementation of MiFID in 2007 did not really change the concept of “doing the right thing for your clients”, but it did implement a framework for firms to consider their written policies on delivering best execution, as well as requiring them to expend some thought into designing systems and controls for monitoring and evidencing execution standards. Additionally MiFID was the catalyst for the proliferation of new trading venues. MiFID may have partly prompted market advances and developments over the last six years that include the introduction and improvement in pre and post trade analytics, as well as encouraging different ways of accessing liquidity under a regulated framework via Multi-lateral Trading facilities. The advances in the proliferation of trading tools, along with advances in the analytical tools for monitoring, which have driven the real gains for clients when firms discharge their execution duties in the marketplace.
Rob McGrath, Schroders There is an argument that regulation has helped improve best execution, but I also think there were other market forces at play. For example, volatility has come down and spreads have narrowed. You can try and figure out who is responsible. For example, some high frequency trading strategies have helped narrow the spreads but it is not just because of them. It is important to take into account all of the factors. Things can always be better and I attend many meetings as part of the buyside on this subject. We believe that it is important to be proactive and make suggestions on how things can improve to the regulators.
Michele Patron, AllianceBernstein Over the course of the years, we have seen the trading process moving from a more “lumpy” activity to “stream”, for a variety of reasons: the increasing use of algos, which fragment parent orders in smaller pieces in the attempt to minimize footprint; the decreased ability of investment banks to offer block axes and, clearly, the multiplication of trading venues introduced by MiFID. So, in a nutshell, I think that the trading process has changed, and the buyside firms need to stay abreast of changing market microstructure.
What challenges are there to achieving best execution today?
Neil Joseph, JP Morgan The challenges are almost as varied or as limited as a firm chooses to define them. However, as we evolve targets and implement ever more ambitious monitoring frameworks, our challenges increase in number and complexity. For example, when brokers provide us with improved and varied methods of trading, ranging from new algorithmic strategies to numerous ways of accessing risk capital, a greater challenge is presented to firms to find better ways of monitoring and evaluating these new offerings, as well as building tools within our systems and controls to make better use of them. When market developments manifest themselves as quicker access to liquidity for client trades and more consistent decision-making in terms of defining an appropriate strategy for implementing trades; the real winner is the underlying client.
Rob McGrath, Schroders Fragmentation is certainly a problem especially for buyside firms who may not have as sophisticated tools and systems as the larger firms. Liquidity is also a big issue. One reason is that many of the high frequency traders that were there are now gone and to a certain extent the liquidity from the banks has also dried up. The other main problem as I mentioned before is the lack of a consolidated tape.
Michele Patron, AllianceBernstein It comes down to liquidity: the multiplication of venues, in terms of number and type of offerings, has made the liquidity sourcing more challenging for the buyside. In addition to that, nowadays the trading world is extremely dynamic, hence continuous monitoring is needed to assure optimal outcome.
© BestExecution 2014