While there is a no one size fits all solution for measuring best execution and transaction cost analysis across asset classes, geographies and firms, it would be beneficial to have broad based best practices, including due diligence as to how execution quality is gauged, according to the latest FICC Markets Standards Board (FMSB) spotlight review.
The review points out that while the various regulatory requirements for measuring execution quality vary by jurisdiction and asset class, wholesale fixed income, currencies and commodities (FICC) markets face specific challenges in achieving high standards of transparency, openness and fairness.
The review notes that designing best practice focused on the measurement of execution quality “must strike a fine balance between being detailed enough to improve consistency in how market participants engage with each other while not being so prescriptive that it harms liquidity.”
It adds that given the diversity of FICC markets, the amount of trading activity and data available, product complexity, unique market structure of individuals asset classes and market segments needs to be taken account of.
Good quality data, of course, is a key component and should form part of any industry best practice. Market participants are advised to dedicate time and resources to ensure the data is collected through the appropriate use of public data sources, such as electronic trading platforms and post- trade reporting, consensus and evaluated pricing and internal historical databases.
Moreover, the review said this observed data must reflect the ‘real’ available liquidity for the relevant market participant and in the right size. It must also pass the reliability test which means there are robust processes to certify the data “is not stale or erroneous, and that there is proper time stamping and labelling.”
At the time of writing, the review said there is a limited public consensus on the data inputs and processes that should be included.
Mark Yallop, chair of FMSB, said, “This spotlight review suggests that there may be benefits to agreeing broad best practices for measuring execution quality, both to better fulfil regulatory requirements and to achieve greater operational and cost efficiency. Drawing on themes already identified in earlier Spotlight Reviews, this study highlights the importance of ensuring good quality data – from the broadest, most reliable and most appropriate sources – in order to measure the quality of trade execution.”
Rupak Ghose, senior adviser at FMSB, added, “The series of four market structure spotlight reviews focused on emerging themes such as model risk in algorithmic trading, the critical role of data management, the changing surveillance environment and processes around measuring execution quality. A common theme throughout this series is the increasing importance of data quality and technology advancements, such as machine learning, in shaping the financial market landscape.”
He added, “Ensuring that governance and industry best practice keeps up with the rapid evolution of these trends is more important than ever in today’s complex financial system.”
This Spotlight Review is intended to benefit front office trade execution on the buyside as well as within market makers, and those responsible for overseeing regulatory requirements in compliance and risk functions.