MiFID II Best Execution Reports Unused

Shanny Basar

The majority of firms do not plan to use their MiFID II best execution reports internally according to a survey.

MiFID II, the regulations which went live in the European Union at the start of this year, strengthened the best execution requirements and expanded the mandate from equities into other asset classes, including fixed income, for the first time.

The survey said almost 60% of respondents have no plans to use their best execution reports internally, even though the data would improve their execution quality, client offering and ability to make better informed business decisions.

In addition nearly two-thirds, 65%, of respondents do not monitor trades systematically according to best execution criteria, despite a legal obligation to comply with best execution under MiFID II. Cappitech, a provider of regulatory technology for financial services, surveyed more than 100 European buy-side  and sell-side compliance executives.

Ronen Kertis, chief executive and founder of Cappitech, said in a statement: “Many firms still don’t define their best execution policies properly, and many of those that do so don’t have a system to monitor their policies in a systematic fashion. Furthermore, the operational processes in many cases continue to be unnecessarily laborious and complex.”

Block trades

MiFID II has also boosted volumes of electronic block trading. The regulation aimed to encourage trading on lit venues by introducing double volume caps on trading in dark pools. However, large-in-scale trading above a specified size has a waiver and the market share for electronic blocks has grown.

Tim Cave, analyst at consultant Tabb Group, said in a report that the  most notable trend last month was the volume of block trades. They reached a record in October with an average daily notional of €1.6bn, up from €1.24bn in September.

Cave said the increase in volume was coupled with a continued “right-sizing” of equity liquidity following the lifting in September of the first set of MiFID II dark pool caps.

“Newcomer Cboe LIS posted record average daily volumes in October (€348m) as it continued to onboard multiple new members, and it has now been a larger LIS market than its longer-established rival the Turquoise Plato Block Discovery Service for three months in a row,” added Cave. “Block incumbents Liquidnet and ITG Posit tied for the top spot this month, with daily LIS volume of €404m.”

Periodic auctions

Cave continued that volumes of periodic auctions, seen as a dark pool alternative, fell from 2.5% to 2.2% of total order book trading as dark MTF volumes continued to rise.

Last week the European Securities and Markets Authority launched a call for evidence on periodic auctions for equities. The regulator is reviewing frequent batch auctions – which are for a very short time during the trading day. Esma is concerned that periodic auctions are being used to  circumvent the double volume caps and the MiFID II transparency requirements.

Esma said it has observed that the trend for periodic auctions seem to be driven by instruments that have been suspended under the double volume caps. However, Esma also acknowledged that investors may be using periodic auctions to reduce the impact of factors such as speed and latency, and to carry out activity that had previously been over-the-counter prior to MiFID II entering into force.

Steven Maijoor, chair of Esma, said in a statement: “If Esma comes to the conclusion that frequent batch auction systems violate the spirit and the rules of MiFID II, we will develop appropriate policy responses.”


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