Can a Firm Prioritize Speed over Price in an RFQ and Still Be MiFID II Compliant?

Concept

A firm can, with procedural diligence, prioritize speed over price in a Request for Quote (RFQ) and maintain full compliance with the Markets in Financial Instruments Directive II (MiFID II). The regulatory architecture of MiFID II, specifically Article 27 of the Directive and the supplemental detail in the Delegated Regulation (EU) 2017/565, establishes a multi-faceted framework for best execution. This framework is built upon the principle of taking all “sufficient steps” to obtain the best possible result for a client, a mandate that extends across all financial instruments, including those transacted via bilateral price discovery protocols like RFQs.

The core of the compliance question rests on understanding that MiFID II does not define “best execution” as a singular pursuit of the most advantageous price. Instead, it enumerates a series of execution factors that must be considered in their totality. These factors include price, costs, speed, likelihood of execution and settlement, size, and the nature of the order.

The regulation empowers firms to determine the relative importance of these factors, provided this determination is based on a transparent and justifiable methodology. This process must be systematic, demonstrable, and codified within the firm’s formal Order Execution Policy.

The Architecture of Execution Factors

The MiFID II framework moves the concept of best execution from a simple, price-centric outcome to a sophisticated, process-oriented obligation. The directive recognizes that in certain market environments or for specific transaction types, the velocity of execution is the dominant variable in achieving the optimal result for the client. A fleeting opportunity in a volatile market, the need to minimize exposure duration, or the execution of a large order susceptible to information leakage are all scenarios where a marginal price concession is strategically subordinate to the certainty and speed of completion.

The MiFID II best execution obligation requires firms to take all sufficient steps to obtain the best possible result for their clients, considering a range of factors beyond just price.

A firm’s ability to prioritize speed is therefore a function of its ability to evidence its decision-making process. The regulatory expectation is that the firm’s Order Execution Policy will explicitly detail the circumstances under which different execution factors will be prioritized. For a professional client, the policy can be more nuanced, reflecting a sophisticated understanding of their strategic objectives. For a retail client, the total consideration ▴ the price of the instrument combined with all associated costs ▴ is generally paramount, making a non-price-centric approach more difficult to justify, though still possible under specific, well-documented conditions.

What Is the Role of Client Characterization?

The regulation explicitly requires firms to consider the characteristics of the client (retail or professional), the order itself, the financial instrument, and the available execution venues. This multi-layered analysis is foundational. For a professional client executing a large, multi-leg options strategy in a fast-moving market, the likelihood and speed of completing all legs of the trade simultaneously can far outweigh a minor improvement in the price of any single leg.

The potential cost of a partial execution or significant slippage while chasing a better price ▴ known as implementation shortfall ▴ is a quantifiable risk that can be legitimately prioritized. The firm’s system must be architected to capture this rationale at the point of execution, linking the decision directly to the pre-defined criteria in its execution policy.

Therefore, compliance is achieved through the establishment of a robust, evidence-based operational framework. It requires a systemic approach where the trading desk’s actions are a direct and logical output of the firm’s documented policies, which in turn are grounded in the principles set forth by MiFID II. The focus shifts from defending a single outcome to demonstrating a consistently applied, compliant process.

Strategy

Strategically embedding the ability to prioritize speed over price within a MiFID II compliant framework requires the design and implementation of a dynamic and evidence-based Order Execution Policy. This policy is the central pillar of a firm’s strategy, serving as the operational blueprint that guides and justifies execution decisions. It must be a living document, capable of adapting to diverse market conditions and client objectives, while simultaneously producing a clear, auditable trail for regulatory scrutiny.

Developing a Defensible Execution Policy

The first strategic imperative is to construct an Order Execution Policy that explicitly articulates the firm’s methodology for weighing the MiFID II execution factors. This involves moving beyond generic statements and creating a granular matrix of scenarios. The policy must detail how the firm determines the relative importance of price, cost, speed, and likelihood of execution for different asset classes, order types, and client categories.

For instance, the policy should clearly state that for liquid, small-sized orders in standard market conditions, price and cost (total consideration) are the primary drivers. Conversely, for illiquid instruments, large orders, or during periods of high market volatility, the policy must codify the elevation of speed and likelihood of execution as potentially dominant factors. This creates a pre-approved “decision tree” that empowers traders to act decisively while remaining within compliant boundaries.

Comparative Analysis of Execution Factor Weighting

To make this strategic framework tangible, firms must systematically analyze and document the trade-offs. A core component of this strategy is the use of pre-trade analytics to assess the likely impact of different execution approaches. This analysis forms the basis for justifying a particular strategy for a given order.

Firms must check the fairness of the price proposed to the client in OTC transactions by gathering market data and comparing it with similar products where possible.

The following table illustrates how a firm might strategically adjust the weighting of execution factors based on prevailing market conditions and order characteristics. The weights are illustrative, representing their relative importance in the decision-making process.

The Role of Transaction Cost Analysis

TCA is the primary tool for validating the execution strategy both before and after the trade.

• Pre-trade TCA models are used to estimate the potential market impact and execution risk of an order. If the model indicates a high probability of significant price slippage for a large order worked over time, it provides a quantitative justification for using an RFQ protocol aimed at immediate execution, even at a slightly wider spread.
• Post-trade TCA serves to verify the effectiveness of the chosen strategy. By comparing the execution results against relevant benchmarks (e.g. arrival price, VWAP), the firm can demonstrate that its decision-making process consistently leads to the best possible results for clients under the circumstances. This data is crucial for the annual RTS 28 reports, which require firms to provide a summary of their execution quality analysis.

This strategic approach transforms the compliance burden into an operational advantage. By building a robust, evidence-driven system for execution, the firm not only meets its regulatory obligations but also enhances its ability to deliver superior, risk-managed outcomes for its clients. The key is to ensure that every decision to prioritize speed is a deliberate, documented, and defensible strategic choice, not an ad-hoc judgment.

Execution

The execution of a MiFID II-compliant strategy that prioritizes speed requires a precise and technologically integrated operational workflow. This workflow must ensure that the decision to elevate speed above price is systematically justified, documented, and auditable. The focus of execution is on creating an incontrovertible record that demonstrates adherence to the firm’s Order Execution Policy at every stage of the order lifecycle.

Operational Playbook for Speed-Prioritized RFQs

When a trader determines that speed is the critical factor for a given order, consistent with the firm’s policy, a specific set of actions must be triggered. This is not a matter of discretion alone; it is a procedural execution that must be embedded within the firm’s Order Management System (OMS) or Execution Management System (EMS).

1. Order Classification ▴ The process begins the moment the order is received. The trader, guided by the OMS/EMS interface, must classify the order based on characteristics defined in the execution policy. This could be a flag for ‘High Volatility’, ‘Large Order Size’, or ‘Time-Sensitive Strategy’. This initial classification is the first piece of the audit trail.
2. Pre-Trade Justification ▴ Before initiating the RFQ, the system must prompt the trader to record the rationale for prioritizing speed. This should be a structured input, not free-form text, linking the decision back to a specific clause in the execution policy. For example ▴ “Reason ▴ Minimize market impact for large order in volatile conditions, per Execution Policy Section 4.2b.” The system should automatically snapshot relevant market data at this point (e.g. current volatility, bid-ask spread).
3. Venue Selection ▴ The RFQ is sent to a pre-defined list of execution venues that are known to provide rapid and reliable quotes for the specific instrument. The firm’s annual analysis of execution venues (as required by RTS 28) should support the inclusion of these venues for this type of trade.
4. Quote Evaluation and Execution ▴ When quotes are returned, the system must log the price, time, and size of all responses. The trader executes the trade with the chosen counterparty. The critical data point is the timestamp delta between the request and the execution. A decision to trade on a slightly inferior price but with a significantly faster response must be systemically captured.
5. Post-Trade Documentation ▴ Immediately following execution, the system should compile a complete record of the trade. This record is the core of the compliance evidence.

How Is the Audit Trail Constructed?

A robust audit trail is the ultimate proof of compliant execution. The data must be captured automatically by the trading systems to ensure its integrity. The following table details the essential data points that must be recorded for every RFQ where speed is prioritized.

A firm must be able to demonstrate to its clients, at their request, that it has executed their orders in accordance with its order execution policy.

By embedding this level of detail into the execution workflow, the firm creates a powerful defensive file for each trade. When a regulator questions why a trade was not executed at the best available price, the firm can instantly produce a complete record. This record will show the market conditions, the policy clause that was invoked, the timing of all quotes, and the explicit rationale for prioritizing speed. This transforms the conversation from a subjective debate about a single price to an objective review of a compliant, systematic process.

Reflection

The architecture of compliance is a system of demonstrable proofs. Having examined the mechanics of justifying speed over price within the MiFID II framework, the essential consideration becomes the integrity of your firm’s own operational systems. Does your execution policy function as a dynamic guide for decision-making or as a static document for regulatory submission? Is your technology configured to capture not just the outcome of a trade, but the intent behind it?

The principles outlined here provide the components for a robust compliance framework. The ultimate strength of that framework, however, depends on its integration into the living culture and technology of the trading floor. The capacity to prove best execution is a direct reflection of the system designed to achieve it. The challenge is to ensure that system is built for clarity, evidence, and precision in every action it undertakes.