Has the Removal of RTS 27 and RTS 28 Made Transaction Cost Analysis More Important?

Concept

The removal of the RTS 27 and RTS 28 reporting requirements represents a fundamental recalibration of the European best execution framework. It signals a deliberate shift away from a system reliant on standardized, public data disclosures toward a principles-based paradigm where the onus of proof rests squarely on the internal governance and analytical capabilities of each investment firm. The core obligation to achieve best execution was not diminished; rather, the methodology for demonstrating compliance has become a more demanding, evidence-based exercise. The prescriptive, one-size-fits-all nature of the reports, which detailed execution quality metrics from venues (RTS 27) and firms’ top execution venues (RTS 28), was ultimately judged to be of limited utility, providing data that was costly to produce and rarely used for meaningful comparison.

This regulatory evolution elevates the function of Transaction Cost Analysis (TCA) from a supplementary tool to a central pillar of a firm’s operational and compliance architecture. With the disappearance of the public benchmark data that RTS reports provided, a void was created. Filling this void requires a firm to construct its own proprietary system of measurement, analysis, and validation.

TCA becomes the engine for generating the specific, granular, and context-rich evidence needed to satisfy the enduring mandate of MiFID II ▴ to act in the client’s best interest by taking all sufficient steps to obtain the best possible result. The dynamic has moved from public attestation to internal demonstration, making a robust TCA framework indispensable.

The regulatory pivot from public reporting to a principles-based approach places a firm’s internal analytical rigor at the center of demonstrating best execution.

The New Locus of Responsibility

The core change is a transfer of the evidentiary burden. Previously, a firm could, to an extent, point towards the public RTS 27 and RTS 28 reports as part of its best execution process. While these reports were widely criticized for their lack of comparative value, they formed a visible, if flawed, part of the compliance landscape. Their removal eliminates this external reference point.

Now, regulators and clients alike will look inward, examining the firm’s own processes and data. This requires a TCA system that is not merely a post-trade reporting tool but a comprehensive, full-lifecycle governance framework.

This internal system must be capable of justifying the entire execution process, from the selection of a trading strategy and venue to the in-flight management of an order and the forensic analysis of its outcome. The questions that must be answered have become more sophisticated. It is no longer sufficient to list the top five venues used; a firm must now be able to articulate why those venues were chosen for specific types of orders under specific market conditions and prove, with its own data, that this choice was part of a systematic process designed to deliver the best outcome. This is the new operational baseline, and TCA is its foundational language.

Strategy

In the environment following the cessation of RTS 27 and RTS 28 reporting, the strategic imperative for investment firms is the development of a proprietary intelligence framework. This framework’s purpose is to replace the standardized, public data streams with a more potent, customized, and defensible system of analysis. The strategy is one of internalization; firms must now build the analytical machinery that allows them to rigorously monitor, justify, and optimize their execution quality from within. This requires a move beyond legacy TCA, which often focused on simple post-trade benchmarks, toward a holistic system that integrates pre-trade, intra-trade, and post-trade analytics into a continuous feedback loop.

From Compliance Chore to Competitive Differentiator

A sophisticated TCA strategy reframes the best execution obligation. It becomes an opportunity to generate competitive alpha through superior execution quality. By systematically analyzing transaction costs, firms can identify and mitigate sources of slippage and market impact, directly enhancing portfolio returns.

This involves creating a detailed execution policy that is both documented and empirically validated by the firm’s own TCA data. The policy ceases to be a static document and becomes a living framework, constantly refined by the insights generated from trade analysis.

The core components of this strategy include:

• Systematic Venue Analysis ▴ This involves a continuous, data-driven assessment of execution venues based on a wide range of factors beyond just price. A firm’s TCA system must capture data on fill rates, latency, reversion, and the potential for information leakage at each venue. This analysis informs the firm’s smart order routing logic and its strategic decisions about where to place specific types of orders.
• Peer Group Benchmarking ▴ In the absence of public RTS data, firms must find new ways to contextualize their performance. Advanced TCA systems allow for anonymized comparison against aggregated peer data, providing a more relevant benchmark than generic market-wide indicators. This allows a firm to understand if its trading costs for a particular strategy are high or low relative to other institutions executing similar trades.
• Algorithmic Performance Measurement ▴ A critical part of modern execution is the selection of trading algorithms. A strategic TCA framework must be able to “look inside the black box” of the algorithms it uses. This means analyzing not just the outcome of the parent order but also the behavior of the child orders, the venues they were routed to, and the market conditions at the time of their execution.

A firm’s strategic response involves architecting an internal, data-centric system that transforms the best execution mandate into a source of performance advantage.

Architecting the Internal Data Ecosystem

The suspension of the RTS reports necessitates a strategic investment in a firm’s data infrastructure. The goal is to create a unified data ecosystem where trade lifecycle information is captured, normalized, and made available for analysis. This is a significant technical and operational undertaking. The table below contrasts the characteristics of the legacy RTS reporting regime with the requirements of a modern, internalized TCA framework.

Execution

Executing a robust Transaction Cost Analysis program in the absence of RTS 27 and RTS 28 is an exercise in operational precision and analytical depth. It requires the implementation of a multi-faceted framework that provides a complete, auditable record of execution decision-making. This framework is not a single piece of software but an integrated system of processes, technologies, and governance structures designed to measure, manage, and minimize transaction costs across the entire trade lifecycle.

The Three Pillars of a Modern TCA Program

A comprehensive TCA program is built upon three interconnected analytical pillars. Each pillar addresses a different stage of the trading process, and together they form a continuous loop of analysis and improvement. The objective is to create a system where the lessons from every trade are used to inform the strategy for the next.

1. Pre-Trade Analysis ▴ This is the predictive component of TCA. Before an order is sent to the market, a pre-trade analysis system provides an estimate of the potential trading costs and risks. It models factors such as the order’s size relative to average daily volume, prevailing market volatility, and the historical performance of different trading strategies for similar orders. This allows the trader or portfolio manager to make an informed decision about the optimal execution strategy, such as choosing between an aggressive, liquidity-seeking algorithm and a more passive, scheduled algorithm.
2. Intra-Trade Analysis ▴ This is the real-time monitoring component. Once an order is live, an intra-trade dashboard provides immediate feedback on its performance against pre-trade benchmarks. It tracks metrics like slippage versus the arrival price, fill rates, and potential market impact. This real-time intelligence allows for dynamic course correction. For instance, if a passive strategy is failing to capture liquidity and is falling behind its benchmark, the trader can intervene and switch to a more aggressive strategy.
3. Post-Trade Analysis ▴ This is the forensic component. After the order is complete, a detailed post-trade report is generated. This report provides a deep-dive analysis of the execution, comparing the final result against a variety of benchmarks. It breaks down the total cost into its constituent parts ▴ such as delay costs, slippage, and commission fees ▴ and attributes performance to specific decisions, venues, and algorithms. This analysis is the primary input for refining the pre-trade models and improving future execution strategies.

Key Metrics in a Post-RTS World

With the standardized reporting of RTS 27 gone, the selection of appropriate TCA metrics becomes a critical internal decision. A robust framework will use a suite of benchmarks to build a complete picture of execution quality. The choice of metrics depends on the asset class, the trading strategy, and the firm’s specific objectives. The table below details several key metrics and their application.

Reflection

The Mandate for Internal Transparency

The dismantling of the RTS 27 and RTS 28 reporting regime should not be viewed as a relaxation of regulatory standards. It is the opposite. It is a challenge to the industry to cultivate a more profound and authentic form of transparency, one that is generated from within and embedded in the operational DNA of every firm.

The focus has shifted from the production of standardized artifacts for public consumption to the maintenance of a dynamic, internal system of evidence. This system must be capable of demonstrating, at any moment, a rigorous, data-driven, and repeatable process for achieving best execution.

This new paradigm creates a distinct performance differential between firms. Those who view this as a mere compliance burden will likely implement the minimum necessary to satisfy auditors. They will operate at a disadvantage. In contrast, institutions that recognize this as an opportunity to build a superior execution intelligence system will gain a persistent competitive edge.

Their TCA framework will become more than a defensive tool; it will be a core component of their alpha generation strategy, a system that continuously refines their interaction with the market to preserve and enhance client returns. The ultimate question for any firm is not whether it is compliant, but whether its internal system of analysis provides a true, unvarnished reflection of its execution quality and a clear path toward its improvement.