What is best execution and how can firms achieve it?


Gareth Coltman

Gareth Coltman, Head of European Product Management, MarketAxess Europe offers his insights.

There is no doubt that MiFID II will have a profound and lasting effect on the European fixed income markets. The impending regulation’s goals not only include increased investor protection but also alignment of regulation across the EU. Moreover, it is looking to increase competition across financial markets and tighten supervisory powers.

Within “increased investor protection”, there are multiple aims which will have a substantial impact on trading. Much emphasis has been placed upon the encouragement of greater transparency, controls to avoid conflicts of interest and investment advice. However, it is the changes to the obligations firms have when receiving, transmitting and executing orders, namely demonstrating best execution, which will have far reaching consequences.

Best execution is split into two main objectives: reporting and monitoring. The reporting requirements, outlined in RTS 27 and RTS 28, require execution venues, including MTFs, organised trading facilities (OTFs) and regulated markets (RMs), Systematic Internalisers (SIs) and market-makers to publish data relating to the quality of execution. Investment firms will also be required to disclose the top five execution brokers and venues by volume on an annual basis.


The slightly more ambiguous piece of best execution regulation is the monitoring requirement. Article 27 of MiFID II states investment firms should take “all sufficient steps to obtain, when executing an order, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.”

The key differentiator in this definition is the word “sufficient”. Prior best execution monitoring obligations required that firms take all “reasonable” steps to achieve the best possible result for their end-clients. This simple update has significant implications on investment firms as they must now meet a minimum standard which is not specifically defined.

Given the ambiguity around the definition of best execution monitoring, firms will need to take extra care when establishing policies and procedures for demonstrating compliance. Our best assumption is that best execution will be viewed by the regulator as a process, set within an individual firm. It will not only show how execution quality is being achieved but also how the process is being measured with the help of transaction cost analysis (TCA). Firms will either develop these tools internally or source data from third party providers or trading venues.

MarketAxess and its subsidiary Trax, as an Approved Reporting Mechanism (ARM) under MiFID I and II, and an Approved Publication Arrangement (APA) for MiFID II, offer a complete trade lifecycle solution to help firms meet their best execution reporting requirements and demonstrate their monitoring policies.

The products and services include Axess All®, the first intra-day trade tape for the European fixed income markets which displays aggregated trade volume and a range of pricing information across all major bond sectors. In addition, there is the Global Composite Price, which has data sourced from TRACE and Trax traded prices and MarketAxess trading platform activity, that provides market insight and aids in price discovery.

Other tools include the Global Relative Liquidity Score, which covers 20,000 bonds daily and is a measurement of current liquidity for an individual bond. Trax Volume and Pricing data also offer a broad and trading-venue agnostic view of market activity in Europe, processing approximately 65% of all fixed income market activity in Europe through its post-trade services.

In addition to data tools, firms can leverage competitive quotes through MarketAxess’ vast pool of liquidity via a network of over 1,200 firms and the Open Trading all-to-all marketplace, which connects disparate pools of liquidity with one another. There is also Transaction Cost Analysis (TCA) reports as both a standard solution for trades executed on the platform and a customisable solution including additional benchmarks, metrics, and outlier/exception flagging.