Concept
The architecture of the Markets in Financial Instruments Directive II (MiFID II) codifies a firm’s duty to its clients into a principle of best execution. This principle is a systemic obligation to organize and deploy resources in a manner that consistently seeks the optimal outcome for a client’s order. The directive moves the conversation from a narrow focus on price to a comprehensive evaluation of multiple, interconnected execution factors. A firm can indeed justify prioritizing speed over price.
This justification, however, must be built upon a robust, evidence-based framework that is systematically applied and demonstrably aligned with the client’s best interests. The regulatory text itself provides the initial toolkit for this justification by enumerating the criteria against which execution quality is measured.
At the heart of this framework is the explicit recognition that the “best” outcome is contingent on context. MiFID II, through Article 27, specifies a set of execution factors that firms must consider. These are the foundational pillars upon which any execution policy is built. They include price, costs, speed, likelihood of execution and settlement, size, and the nature of the order.
The directive empowers firms to determine the relative importance of these factors, acknowledging that a single, rigid hierarchy is operationally unworkable across the diverse landscape of financial instruments, market conditions, and client objectives. This empowerment is also a significant responsibility. The firm assumes the full burden of proof, requiring it to construct a transparent and defensible rationale for its strategic choices.
The MiFID II best execution standard requires firms to consider a wide range of factors beyond just price, allowing for speed to be prioritized when justified by the client’s overall best interest.
This operational latitude is where the system’s intelligence must be demonstrated. For instance, a large institutional order in an illiquid security might prioritize certainty of execution and minimizing market impact over achieving a marginal price improvement. In this scenario, speed is a component of minimizing signaling risk; a slow execution leaks information and can move the market against the client.
Conversely, for a small retail order in a highly liquid blue-chip stock, total consideration, which is the combination of price and explicit costs, will almost invariably be the dominant factor. The firm’s execution policy must be granular enough to differentiate between these scenarios and assign the appropriate factor weighting.
What Are the Core Execution Factors under MiFID II?
The directive provides a clear set of criteria that form the basis of any best execution policy. Understanding these factors is the first step in building a compliant and effective execution framework. Each factor represents a distinct dimension of execution quality, and their interplay determines the final outcome for the client.
- Price This is the price at which the transaction is executed. It is a critical component of the overall value delivered to the client and often serves as the primary benchmark for execution quality.
- Costs These are the explicit charges associated with executing an order. They include execution venue fees, clearing and settlement fees, and any other charges paid to third parties involved in the transaction. The total consideration for the client is a function of both price and costs.
- Speed of Execution This refers to the time elapsed between the reception of an order and its final execution. In volatile markets or for time-sensitive strategies, speed can be a decisive factor in capturing opportunities or mitigating risk.
- Likelihood of Execution and Settlement This factor addresses the certainty that an order will be filled and settled successfully. For illiquid instruments or large orders, the risk of partial or failed execution is a significant consideration.
- Size and Nature of the Order The characteristics of the order itself influence the execution strategy. A large block order requires a different approach to a small, marketable order to manage market impact and information leakage.
The Principle of Proportionality
The justification for prioritizing one factor over another rests on the principle of proportionality. The firm must demonstrate that its chosen execution strategy is proportionate to the client’s objectives and the specific context of the order. This requires a deep understanding of the client’s profile, the characteristics of the financial instrument, and the prevailing market conditions. The decision to prioritize speed is therefore a calculated judgment that speed, in a given situation, is the most critical component of achieving the best possible result.
For example, an algorithmic trading strategy designed to capitalize on fleeting arbitrage opportunities is inherently dependent on speed. In this context, a marginal price concession is acceptable if it ensures the timely execution required to capture the alpha. The firm’s obligation is to define this logic in advance within its execution policy and to monitor the outcomes to ensure the strategy remains effective.
Strategy
Constructing a defensible strategy for prioritizing speed over price under MiFID II is an exercise in architectural design. It requires the firm to build a coherent and internally consistent system of policies, procedures, and controls. This system must translate the abstract principles of best execution into concrete, repeatable operational workflows. The cornerstone of this entire structure is the firm’s order execution policy.
This document is the primary strategic artifact, outlining the firm’s approach to achieving best execution for its clients. It must be clear, comprehensive, and provide sufficient detail for clients to understand how their orders will be handled.
The strategy begins with client and instrument classification. The firm must segment its clients based on their status (e.g. retail or professional) and their typical trading objectives. Similarly, it must classify financial instruments by their liquidity profile, complexity, and the characteristics of their primary markets. This initial segmentation allows the firm to move away from a one-size-fits-all approach and develop tailored execution strategies.
For each combination of client type and instrument class, the policy must specify the relative importance of the execution factors. This is where the decision to prioritize speed is formally articulated and justified.
A firm’s execution policy is the strategic blueprint that must clearly define the circumstances under which speed will be the dominant factor in achieving the best client outcome.
For example, the policy might state that for professional clients trading in highly liquid, exchange-traded derivatives during periods of high market volatility, execution speed is the primary factor. The justification would be that in such conditions, price is highly unstable, and the risk of slippage or missed execution from a slower, price-seeking strategy outweighs the potential for marginal price improvement. The policy must then detail the execution venues and strategies that will be employed to achieve this objective, such as direct market access (DMA) to low-latency exchanges or the use of specific algorithms designed for rapid execution.
Developing the Execution Policy
The execution policy is a living document that must be regularly reviewed and updated. Its development is a multi-stage process that involves several key components. The aim is to create a framework that is both compliant with the regulation and effective in practice.
- Factor Weighting The firm must assign a relative importance or weighting to each of the execution factors for different scenarios. This can be presented in a matrix format, mapping instrument classes and client types to a prioritized list of factors.
- Venue Selection The policy must list the execution venues the firm relies on to meet its obligations. For a speed-focused strategy, this list would likely include exchanges known for their low latency and high throughput, as well as specific liquidity providers chosen for their rapid response times.
- Execution Strategy Description The firm must describe the specific methods it will use to execute orders. This includes the types of orders it will use (e.g. limit, market, pegged) and the algorithmic strategies it may deploy. For speed-sensitive orders, this might involve “aggressor” algorithms that cross the spread to ensure immediate execution.
- Conflicts of Interest Management The policy must explain how the firm manages any potential conflicts of interest. This includes transparency around any payments for order flow or other arrangements that could influence the choice of execution venue.
Comparative Scenarios Speed Vs Price
To illustrate the strategic decision-making process, it is useful to compare scenarios where the primary execution factor shifts. The following table provides a conceptual framework for how a firm might differentiate its approach based on the context of the order.
| Scenario | Client Type | Instrument | Primary Factor | Justification | Execution Method |
|---|---|---|---|---|---|
| Standard Equity Trade | Retail | Liquid Large-Cap Stock | Total Consideration (Price & Costs) | For small, non-urgent orders in liquid names, achieving the best possible price and lowest explicit costs provides the most significant benefit to the client. | Smart Order Router (SOR) seeking price improvement across multiple lit and dark venues. |
| Algorithmic Arbitrage | Professional | FX Spot | Speed | The strategy’s profitability is entirely dependent on executing faster than competitors to capture a fleeting price discrepancy. | Co-located DMA to the primary FX ECNs; use of aggressor orders. |
| Large Block Trade | Institutional | Illiquid Corporate Bond | Likelihood of Execution & Market Impact | The primary goal is to execute the full size of the order without causing an adverse price movement that would erase any potential price savings. | RFQ protocol with a curated set of dealers; use of a dark pool or a negotiated block trade. |
| Market Takedown | Professional | Equity Index Futures | Speed & Certainty | During a significant news event, the client’s objective is to establish or liquidate a large position immediately to react to new information. | Iceberg orders or a volume-weighted average price (VWAP) algorithm with a short time horizon, executed via DMA. |
How Does a Firm Monitor the Effectiveness of Its Strategy?
A strategy is only as good as its execution and the feedback loop that governs it. MiFID II requires firms to monitor the effectiveness of their order execution arrangements and policy to identify and, where appropriate, correct any deficiencies. This involves a continuous process of data collection and analysis. The firm must systematically compare the results it achieves for its clients against the objectives laid out in its execution policy.
If the policy prioritizes speed for a certain type of order, the firm must collect data on execution times and assess whether the chosen venues and strategies are consistently delivering the required performance. This monitoring process is the bridge between the firm’s stated strategy and the evidence required to defend it.
Execution
The execution phase is where a firm’s strategic commitment to best execution is translated into a verifiable audit trail. Under MiFID II, providing evidence that a firm has fulfilled its duty is a data-intensive process. The justification for prioritizing speed over price cannot be a theoretical argument; it must be substantiated by quantitative and qualitative evidence. The primary mechanisms for this are the data generated for and by the firm, as outlined in the Regulatory Technical Standards (RTS), specifically RTS 27 and RTS 28.
Although recent regulatory updates have shifted the emphasis away from the mandatory publication of these reports, the underlying obligation to monitor execution quality and evidence best execution remains firmly in place. Therefore, the data and analytical frameworks developed for these reports continue to be the essential tools for any firm.
RTS 27 provides the raw material. It requires execution venues to publish quarterly reports detailing a wide range of execution quality metrics. This includes data on prices, costs, speed, and likelihood of execution for individual financial instruments. Investment firms are expected to ingest and analyze this data from the venues they use.
This analysis allows a firm to benchmark the performance of its chosen venues against alternatives and to verify that they are performing in line with the firm’s execution policy. If a firm’s policy prioritizes speed for a particular trade flow, it must use RTS 27 data to prove that the selected venues are, in fact, the fastest available options for that type of order.
The required evidence is a combination of quantitative analysis from venue performance data and a qualitative summary demonstrating a consistent and effective monitoring process.
RTS 28 represents the synthesis of this analysis. It is the firm’s annual public disclosure, summarizing how it has met its best execution obligations. This report must identify the top five execution venues used for each class of financial instrument and provide a summary of the analysis and conclusions the firm has drawn from its monitoring of execution quality. This summary is the critical narrative.
It is where the firm articulates its justification for its execution strategy. If speed was the priority, the RTS 28 summary must explain why, how this was achieved, and what the outcome was for clients. It must demonstrate a clear and logical connection between the firm’s policy, its choice of venues, and the results achieved.
The Evidentiary Framework in Practice
A firm’s Best Execution Committee or equivalent governance function is responsible for overseeing this process. This body should meet regularly to review the firm’s execution performance and the effectiveness of its policy. The evidence they review is multifaceted and forms the basis of the RTS 28 report.
- Quantitative Analysis This involves the statistical analysis of execution data. Firms will typically use Transaction Cost Analysis (TCA) to compare their execution prices against various benchmarks, such as the arrival price, the volume-weighted average price (VWAP), or the implementation shortfall. For a speed-focused strategy, the analysis would also include metrics like latency (time from order routing to execution) and fill rates.
- Qualitative Assessment This is the narrative that accompanies the data. It should explain the firm’s decision-making process. For example, it might describe the due diligence performed on a new low-latency venue before it was added to the firm’s list of approved venues. It could also discuss the rationale for using a particular aggressive algorithm during a period of high market volatility.
- Regular Reviews The firm must be able to evidence that it regularly reviews its execution arrangements. This includes minutes from Best Execution Committee meetings, records of venue performance reviews, and documentation of any changes made to the execution policy as a result of this monitoring.
Sample Evidence Table for a Speed-Focused Strategy
To substantiate its claim that prioritizing speed was in the clients’ best interest, a firm would need to produce detailed analysis. The following table is a simplified example of the kind of evidence a firm would need to compile and review internally to support the qualitative summary in its RTS 28 report.
| Instrument Class | Primary Venue | Avg. Latency (ms) | Slippage vs Arrival Price (bps) | Fill Rate (%) | Qualitative Justification |
|---|---|---|---|---|---|
| Retail Protection Orders (Stop Loss) | Primary Exchange A | 5 | -2.5 | 99.8% | For stop-loss orders, speed is paramount to protect clients from rapid adverse market movements. The minimal negative slippage is an acceptable trade-off for the high certainty and speed of execution, which prevents larger losses. |
| Professional Algorithmic FX Trades | ECN Provider B | 1.5 | -0.8 | 98.5% | Strategy relies on sub-millisecond execution to capture arbitrage. Venue B provides the lowest latency, which is the single most critical factor for this strategy’s success, as defined in the client’s mandate. |
| News-Driven Equity Trades | MTF C | 10 | -3.0 | 99.0% | During earnings announcements, clients prioritize immediate execution to react to new information. The use of aggressive orders on a high-throughput MTF ensures timely execution in a volatile, fast-moving market. |
What Happens If the Evidence Is Insufficient?
If a firm cannot provide adequate evidence to justify its execution strategy, it faces significant regulatory risk. National competent authorities (NCAs) have the power to scrutinize firms’ best execution arrangements and can impose sanctions for non-compliance. The lack of a robust, evidence-based process for monitoring execution quality and demonstrating client benefit would be a serious breach of MiFID II requirements.
The core of the obligation is the ability to prove, with data and documented procedures, that the firm has taken all sufficient steps to obtain the best possible result for its clients. Without this evidence, any claims about prioritizing speed or any other factor are merely assertions, not a compliant execution strategy.
References
- Finmatek Ltd. “RTS 27/28 ▴ Finmatek Ltd.” Accessed August 4, 2025.
- SALVUS Funds. “Complying with the MiFID II Reporting Obligations of RTS 27 & RTS 28.” 2018.
- S&P Global. “Connecting the dots between Article 27, RTS 27, and RTS 28.” 2018.
- DLA Piper. “ESMA publishes statement on reporting requirements under RTS 28 of MiFID II.” 2024.
- Simmons & Simmons. “ESMA public statement on reporting requirements under RTS 28.” 2024.
Reflection
The regulatory architecture of MiFID II provides firms with both a mandate and a methodology. The mandate is to achieve the best possible result for the client. The methodology is a system of policies, monitoring, and evidence. The decision to elevate speed above price is a strategic choice within this system.
It requires a firm to look inward at its own operational capabilities and outward at the dynamic environment of the market. How does your own framework balance these competing, yet complementary, factors? The answer to that question defines the true quality of your execution.
Glossary
Financial Instruments
Prioritizing Speed
Execution Quality
Execution Factors
Execution Policy
Relative Importance
Marginal Price Improvement
Market Impact
Total Consideration
Best Execution
Execution Strategy
Possible Result
Marginal Price
Order Execution Policy
Under Mifid
High Market Volatility
Price Improvement
Speed-Focused Strategy
Execution Venues
Execution Arrangements
Mifid Ii
Policy Prioritizes Speed
Regulatory Technical Standards
Rts 27
Rts 28
Best Execution Committee
Volume-Weighted Average Price
Transaction Cost Analysis
