Peter Randall, CEO, Equiduct
The uncertainty over the economy and the prolonged eurozone crisis may be blamed for the parlous state of the equity markets but it is not the only reason. The continued lack of clarity on how to achieve best execution has also shaken investor confidence. Despite MiFID and the reams of White Papers and articles trying to explain the concept, it remains elusive.
Harking back to 2007, the original rules were supposed to provide the backbone. However, the definition was all encompassing and the terminology was difficult to decipher. For example, what was meant by the need to “take all reasonable steps to obtain the best possible result for clients taking into account the execution factors such as price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order.” How could participants prove that their brokers had also established and implemented effective ‘execution arrangements’ for complying with the best execution obligation?
There was also no framework for monitoring whether firms were pursuing the best execution course of action plus as a directive and not a regulation, implementation has been slow and uneven across the national boundaries. It is no surprise then that many firms adopted a generic best execution policy. There was hope that MiFID II, which is currently being negotiated between the European Parliament and the Council of Ministers, and expected to take effect in 2015 and 2016, would have addressed some of these shortcomings.
This does not look likely. It will continue not to be mandatory to prove best execution plus the fate of the linchpin – the much needed consolidated tape which shows where the best execution is – has been left unclear. There is currently no single universally accepted post-trade picture that market participants can look at to assess which trades went where and why. The only way to achieve best execution is to include prices of every platform in Europe. Although the European Commission has thrown its weight behind a tape, it has been left open to a public tender process, rather than setting a specific provider.
These developments may not have as great an impact on the large institutional investor or fund management house which have the resources to navigate the markets and the clout to hold their brokers to account. This is often not the case though with the smaller retail investor. In fact, the UK’s Financial Services Authority has raised doubts over whether retail investors were getting the best deals when it published a paper highlighting the practice of brokers choosing venues that offer them financial incentives. The regulator noted that some brokers were sending client trades to venues that were offering less competitive deals for the brokers’ clients in return for secret commissions pocketed by the broker itself.
A movement is growing among retail investors to embrace competition and look farther afield than the mainstream stock markets for the best prices. They are increasingly becoming a more important member of the trading community and are looking to have their voices heard.