FINDING THE RIGHT BALANCE.

Artur Fischer, interim CEO of Equiduct speaks to Best Execution about the inadequacies of best execution guidelines from the perspective of a regulated exchange.

How, from an exchange point of view, would you define best execution? Has the meaning changed over the years?

The term itself means different things to different people in the market – the buyside, the sellside, exchanges and end users – and unfortunately my impression is that the meaning hasn’t changed.

Best execution as defined by MiFID is only good for the end user, and there’s not necessarily any incentive for the distribution units (e.g. online brokers and retail banks). As a regulated exchange we need these distribution units to reach the end user. However, the best execution criteria are not attractive to the distribution units – in fact quite the opposite is the case.

The original idea was that competition would sort things out, and perhaps the criteria for best execution would not be of relevance for the distribution units. But the end user ultimately will demand that their bank delivers to the same standards as the competition. If they don’t then they can switch brokerage accounts.

The crux of the matter from my perspective is that I sell to these distribution units. In turn they offer our product to their clients. It’s exactly the same as if one goes to Tesco (UK supermarket chain) in order to buy coffee or wine. Now the decision about what you can or cannot buy is not made by the producer of these commodities, but by Tesco – the “distribution unit”. So, they decide whether they want to stock your product or not.

The problem with best execution, using our Tesco analogy, is their criteria to list me in their range are quite different from the criteria retail users have when they buy the product. And, aspects that are important for the distribution unit (e.g. logistics and delivery) will not necessarily be important to the end user.

Another issue is that end users do not have a meaningful representation. We have millions of end users, but how will they all organise themselves into a single voice? Typically, they don’t.

Have there been any unintended consequences from best execution as a result of it being ushered in under MiFID?

Best execution could be said to have become less affordable. Previously, we had the concentration rule, which meant one got the best price at the venue that had the highest volumes and most diversified order flow. Subsequently, through MiFID, a plethora of new venues  – MTFs/exchanges – emerged in Europe. Sometimes this resulted in better prices being achieved, but not always on the same venue. That meant that it became more complicated and expensive to actually identify where the best execution was. It also required technology to source best price using including Smart Order Routers (SORs).

Now, if one comes to Equiduct, we calculate what the price would have been and provide it to you at a low cost. Our system deploys a mathematical model to facilitate that low cost and offers the same quality of service that only SORs can offer. Under best execution the quality of your execution might have improved, however, it’s not for everyone – only for those that can afford it.

How can exchanges optimise technology to deliver best execution and re-engage European investors?

Best execution is not just about achieving the best price but also the lowest transaction cost. So, obviously we have to look continuously at reducing our costs, but at the same time we require low latency. Consequently it’s a struggle between being the cheapest and the fastest. Therefore your technology [at an exchange] has to provide a balance between being cutting edge and low cost. It’s not good enough just to have the best technology.

To engage investors we don’t have to spend €20m to educate our end users. In theory our website is visible to anybody and it’s just a matter of doing it smart and doing it right. We need to get our message out there and explain what the advantages are for end users to trade via our platform, but in order to enable end users to access Equiduct’s offering in the first place, retail banks and online brokers need to provide our offering to that constituency.

Build versus Buy? With multiple exchanges using the same or similar technology providers, is in-house technology development the best way for exchanges differentiate their product offerings?

This all revolves around the issue of cost. Certain functions do not translate into competitive advantage. For example; connecting to a clearing house. As an exchange, I will not lose business if I opt to use a software component or services which are also provided to other parties needing to connect to a clearing house. I don’t care if I utilise it with ten other parties or on my own. So, certain services can be regarded as a commodity and do not help differentiate. As an exchange we cannot take any risk on board and the system has to be operationally safe. But in addition it has to be cheap.

Other components can clearly provide differentiation. Take the components relating to our market model. This is something we would not share with any other party. Equiduct has developed its own software and intellectual property, which distinguishes us. We have the ability to react swiftly to market demands, regulatory changes and beat the competition.

Can new networking tools such as Social Media be used to help educate and communicate with the end investor?

As an exchange we are really trying to use Social Media, and believe we cannot afford not to be involved. We have our sites and try to promote them. Currently it’s not making a significant difference in terms of impact, but potentially it will. Just like a lottery game at some stage you’ll get lots of followers and people connecting. Every month staff in Berlin and London analyse the statistics using Google tools on how many people have visited our website. Wherever possible we try to communicate through Social Media and not necessarily on topics that have to do with our market (e.g. interacting with the media). Personally I have a Twitter account (@fisart) and have been interviewed on TV a number of times to communicate our message.