Can the Data from MiFID II RTS 28 Reports Be Used to Satisfy US Best Execution Requirements?

Concept

The assertion that data from MiFID II RTS 28 reports can directly satisfy U.S. best execution requirements stems from a misunderstanding of two fundamentally different regulatory architectures. One system is engineered for public disclosure, the other for a continuous, dynamic internal process of diligence. Viewing them as interchangeable overlooks the critical divergence in their core objectives, operational cadence, and the nature of the evidence they are designed to produce. The operational challenge for a global financial institution is not one of simple data substitution, but of systemic integration, understanding how a static, historical dataset from a European framework can serve as an input into a dynamic, principles-based supervisory process in the United States.

At its core, the Markets in Financial Instruments Directive II (MiFID II) Regulatory Technical Standard 28 (RTS 28) mandates a specific form of transparency. It requires investment firms to publish an annual report detailing the top five execution venues they used for each class of financial instrument. This report quantifies where client orders were sent, breaking down the flow by volume and order type (passive, aggressive, directed). Accompanying this quantitative data is a qualitative summary explaining how the firm approached its execution strategy and the quality obtained.

The entire construct is a post-trade, historical artifact designed to give clients and the public a clear window into a firm’s execution practices over the preceding year. Its primary function is one of accountability through disclosure.

Conversely, the U.S. best execution doctrine, principally codified in Financial Industry Regulatory Authority (FINRA) Rule 5310, establishes an ongoing fiduciary obligation. It compels a broker-dealer to exercise “reasonable diligence” to ascertain the best market for a security and to buy or sell in that market so the resulting price is as favorable as possible for the customer under the prevailing conditions. This is not a static, annual reporting task.

It is a continuous, pre-trade and post-trade duty that must be evidenced through a “regular and rigorous” review process, conducted at least quarterly. This review is substantially more granular than an RTS 28 report, demanding a security-by-security and order-type-by-order-type analysis of execution quality against a backdrop of potential alternative venues.

The fundamental disconnect lies in their purpose ▴ RTS 28 is a report on past actions for public transparency, while FINRA 5310 is the documentation of a continuous, internal process of ensuring optimal outcomes.

The U.S. framework is explicitly principles-based, demanding a holistic assessment of multiple factors beyond just the venue of execution. FINRA outlines a non-exhaustive list of considerations that form the bedrock of a firm’s best execution committee reviews. These include price improvement statistics, the speed and likelihood of execution, transaction costs, and the character of the market for the specific security.

The mandate is to compare the quality of execution obtained through existing order routing arrangements against the quality that could have been obtained from competing markets. An RTS 28 report, by focusing only on the top five venues used, inherently lacks this comparative analytical dimension against the broader universe of available liquidity.

Therefore, the central question for a compliance or trading system architect is not whether RTS 28 data is useful, but how it can be integrated into the more demanding U.S. operational workflow. The European report provides a factual summary of historical order flow, which can serve as a foundational data layer. It answers the question, “Where did our orders go?” The U.S. requirement, however, poses a more complex set of questions ▴ “Why did they go there?

Was that the optimal choice on a systematic basis? And how does our firm prove it, quarter after quarter?” The data from RTS 28 is an input, a single piece of evidence, but it is far from the complete body of proof required to satisfy the rigorous, ongoing supervisory expectations of U.S. regulators.

Strategy

A strategic approach to leveraging MiFID II RTS 28 data within a U.S. best execution framework requires a clear-eyed gap analysis. The goal is to construct a compliance architecture that treats the RTS 28 report not as a solution, but as a component within a larger, more dynamic system. This strategy involves augmenting the static, high-level European disclosure with the granular, analytical evidence demanded by FINRA’s principles-based regime. The core of this strategy is the development of a supplementary data and analysis layer that bridges the divide between the two regulatory philosophies.

Mapping the Regulatory Divide

The first step in building this bridge is to systematically map the requirements of each regulation to understand precisely where the data overlaps and where it diverges. An RTS 28 report provides a snapshot of venue concentration. A U.S. best execution file, in contrast, is a detailed analytical document justifying the quality of outcomes. The following table illustrates the conceptual differences in their requirements, highlighting the significant analytical delta a firm must address.

Constructing the Augmentation Layer

With the gaps identified, the strategy shifts to building a process that systematically enriches the RTS 28 data. This is not a manual task but a systemic one, requiring the integration of data from multiple sources, most notably a sophisticated Transaction Cost Analysis (TCA) provider. The RTS 28 report can serve as the starting point for each quarterly review, identifying the primary routing venues that require the deepest analysis.

The augmentation process involves several key operational steps:

• Data Ingestion ▴ The firm’s quarterly U.S. best execution review process should ingest the raw data used to generate the RTS 28 report. This provides a baseline of all executed orders for the period.
• TCA Integration ▴ This raw execution data must then be processed by a TCA system. This system will append the critical metrics absent from the RTS 28 disclosure, such as execution price versus arrival price, effective spread, and price improvement statistics.
• Comparative Universe ▴ The TCA system must be configured to compare the firm’s execution quality not just within the venues used, but against a universe of relevant competing market centers. This directly addresses the core FINRA requirement to assess execution quality against what could have been achieved elsewhere.
• Qualitative Factor Overlay ▴ The quantitative output from the TCA system must be combined with a qualitative analysis. For example, if a particular venue shows slightly slower execution speed but offers superior price improvement, the firm’s Best Execution Committee must document its rationale for prioritizing price over speed for certain order types. This qualitative overlay is a critical part of the “reasonable diligence” demonstration.

The Role of the Best Execution Committee

The entire strategic framework culminates in the deliberations of the firm’s Best Execution Committee. This committee cannot simply review the RTS 28 report. Instead, it must review the full, augmented data package.

Its mandate is to analyze the TCA reports, review the comparative data, and formally document its conclusions on a quarterly basis. The committee’s minutes become a central piece of evidence for demonstrating compliance with FINRA Rule 5310.

Relying on an RTS 28 report for U.S. best execution is like presenting a building’s blueprint to prove its structural integrity during an earthquake; it shows the plan, not the performance under stress.

This strategic approach transforms the RTS 28 data from a potential compliance liability into a valuable asset. It acknowledges the limitations of the European disclosure and builds a robust, defensible process around it that is tailored to the specific, more demanding requirements of the U.S. regulatory system. The result is a unified compliance architecture that leverages data efficiently while respecting the distinct philosophical underpinnings of each jurisdiction.

Execution

The operational execution of a compliant U.S. best execution program that leverages RTS 28 data requires the design and implementation of a rigorous, repeatable, and auditable workflow. This is where regulatory theory is translated into a concrete system of data analysis, documentation, and governance. The objective is to produce a quarterly evidence package that satisfies the “regular and rigorous review” standard of FINRA Rule 5310, using the RTS 28 data as a foundational, but incomplete, input.

The Quarterly Best Execution Review Protocol

A firm must establish a formal protocol for its quarterly review. This protocol should be documented in the firm’s written supervisory procedures and meticulously followed. The process can be broken down into a series of distinct operational phases, moving from raw data to final governance review.

1. Phase 1 Data Aggregation ▴ On the first day of each new quarter, the system aggregates all client order and execution data from the preceding quarter. This is the same superset of data that would eventually be used for the annual RTS 28 report. The data must be timestamped to the millisecond and include all relevant order attributes, such as symbol, size, order type, and venue.
2. Phase 2 TCA Enrichment and Analysis ▴ The aggregated execution data is fed into the firm’s chosen TCA provider via an automated process. The TCA platform performs a multi-faceted analysis, which must, at a minimum, generate reports on the following factors, segmented by order type (market, limit, etc.) and security class:
   • Price Improvement Analysis ▴ Quantifies the frequency and monetary value of executions at prices superior to the National Best Bid and Offer (NBBO) at the time of order receipt.
   • Effective Spread Analysis ▴ Measures the cost of execution relative to the midpoint of the NBBO, providing a clear view of the all-in cost of liquidity.
   • Execution Speed ▴ Calculates the time from order routing to execution, which is critical for assessing performance in volatile markets.
   • Fill Rate and Likelihood of Execution ▴ Particularly for limit orders, this measures the probability of an order being filled at a given venue, a key consideration beyond just price.
3. Phase 3 Comparative Venue Analysis ▴ This is the most critical phase for satisfying U.S. requirements. The TCA provider must generate a “what-if” analysis, comparing the execution quality the firm achieved at its chosen venues against the quality it could have achieved had it routed orders to other competing market centers. This requires the TCA provider to have access to a deep pool of market-wide execution data.
4. Phase 4 Committee Review Package Generation ▴ The outputs from the TCA analysis are compiled into a standardized review package for the Best Execution Committee. This package must include summary dashboards, detailed exception reports highlighting any orders that received poor execution, and the crucial comparative venue analysis.
5. Phase 5 Governance and Documentation ▴ The Best Execution Committee meets to review the package. The committee’s discussion, findings, and any decisions to alter routing logic must be recorded in detailed minutes. These minutes, along with the TCA reports, form the core of the firm’s evidence of compliance with FINRA Rule 5310.

Data Gap Analysis a Practical Example

To illustrate the practical data gap, consider a firm reviewing its execution of U.S. equity orders. The following table breaks down what an RTS 28 report provides versus what a U.S. best execution review file requires.

The process of satisfying U.S. best execution is not a reporting function but a continuous analytical discipline.

Ultimately, the execution of a compliant program rests on a firm’s ability to build a system that produces not just data, but analytical insight. It must be able to answer the question from a regulator ▴ “You sent 30% of your retail market orders to Venue X. Prove to me that this was the best possible outcome for your clients.” An RTS 28 report can only state that the orders were sent to Venue X. A robust U.S. best execution file, built through the protocol described above, provides the evidence-based proof to answer the regulator’s challenge.

Reflection

From Mandated Disclosure to Systemic Intelligence

The examination of RTS 28 data in the context of U.S. best execution requirements moves beyond a simple compliance checklist. It forces a deeper consideration of a firm’s entire operational framework for execution quality. The process reveals that regulatory compliance is not a series of discrete, jurisdiction-specific tasks, but a holistic system of data capture, analysis, and governance. The limitations of a static disclosure report highlight the inherent superiority of a dynamic analytical system.

The knowledge gained from this analysis should prompt an introspective question ▴ Is our firm’s execution management system merely a tool for satisfying disparate regulatory reports, or is it an integrated engine for generating true operational intelligence? The ultimate advantage lies not in simply meeting the letter of each rule, but in building a unified system that transforms the burden of compliance into a source of competitive edge, ensuring that every order is a reflection of the firm’s deepest commitment to execution quality.