How Do Firms Evidence Best Execution without RTS 27 and RTS 28 Reports? ▴ Question

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Concept

The operational challenge of evidencing best execution has entered a new phase. With the systematic dismantling of the RTS 27 and RTS 28 reporting frameworks, the regulatory apparatus has shifted its focus from standardized, often unread, public disclosures to the internal, systemic integrity of a firm’s execution architecture. This evolution demands a fundamental recalibration in how an institution conceives of and demonstrates its fulfillment of its fiduciary duties.

The absence of these reports removes a procedural checklist, replacing it with a mandate for a more profound, evidence-based articulation of execution quality. Your firm’s internal data, governance protocols, and analytical capabilities are now the primary exhibits in demonstrating compliance and strategic superiority.

The core of this new paradigm is the recognition that best execution is an outcome of a well-architected system, a dynamic process of continuous evaluation and optimization. It is a demonstrable proof of process. The obligation was never truly about the reports themselves; they were merely a flawed instrument of verification.

The true obligation, which persists and is now under greater scrutiny, is the continuous and rigorous process of ensuring client orders are handled with the highest degree of diligence, intelligence, and integrity. Evidencing this requires a move beyond static, historical reporting toward a living, auditable framework that combines qualitative judgment with empirical, quantitative validation.

The dissolution of RTS 27 and RTS 28 shifts the burden of proof for best execution from standardized public reports to the firm’s own internal, dynamic, and data-rich operational framework.

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From Prescribed Reports to Systemic Proof

The transition away from RTS 27 and RTS 28 reporting is an acknowledgment by regulators that true execution quality cannot be adequately captured in standardized tables that lack comparative context. The evidence showed that these reports were cumbersome to produce and rarely used by investors to make informed decisions. Consequently, the responsibility now rests squarely on the firm to construct a narrative of best execution that is both comprehensive and defensible. This narrative must be woven from the data generated by your own trading systems, the logic encoded in your execution policies, and the documented oversight of your governance bodies.

This requires a systemic view where every component of the trading lifecycle contributes to the final evidentiary file. The choice of an execution venue, the parameters of an algorithm, the routing logic for an order, and the post-trade analysis of its cost ▴ all become data points in a larger mosaic of proof. The focus is on demonstrating that the firm has taken all sufficient steps to obtain the best possible result for its clients, considering a range of execution factors including price, costs, speed, likelihood of execution, and size.

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What Is the New Evidentiary Standard?

The new standard is one of demonstrable diligence. It requires firms to articulate why specific execution strategies were chosen and to back up those decisions with data. This means your Best Execution Policy is a critical, living document that outlines the architecture of your decision-making process.

It must be a detailed playbook that explains how you evaluate execution venues, how you select brokers, and how you use different order types and algorithms to achieve specific outcomes for different types of financial instruments and client orders. The evidence of best execution becomes the documented output of this policy in action ▴ the pre-trade analysis, the real-time monitoring data, and the post-trade transaction cost analysis (TCA) that validates the chosen strategy.

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Strategy

In a market structure devoid of the RTS 27 and RTS 28 reporting mandates, a firm’s strategy for evidencing best execution must pivot from reactive compliance to proactive demonstration. The strategic objective is to build an internal system of record that is so robust, transparent, and analytically sound that it makes the absence of the old reports irrelevant. This system becomes the definitive source of truth for regulators, clients, and internal oversight committees. The strategy is built on two pillars ▴ a qualitative framework that governs decision-making and a quantitative framework that measures the outcomes.

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The Qualitative Framework Governance and Policy

The qualitative aspect of the strategy centers on creating and maintaining a comprehensive and dynamic Best Execution Policy. This policy is the constitution of your execution process. It must clearly articulate the methodologies for venue and broker selection, the management of conflicts of interest, and the governance structure for oversight. The strategy involves treating this policy as an active risk management tool.

A key component of this strategy is the formalization of the venue selection and review process. Firms must be able to provide a clear rationale for why they connect to certain liquidity pools and not others. This involves a documented analysis of each venue against a consistent set of criteria.

This process must be repeated at regular intervals, at least annually, and any changes to the venue list must be justified and recorded. The goal is to create a clear audit trail that shows a thoughtful and deliberate approach to accessing liquidity.

Define The Execution Policy This document must be the central pillar of the strategy. It needs to detail the firm’s approach to achieving best execution across different asset classes and client types. It should specify the execution factors the firm considers (price, cost, speed, etc.) and how they are prioritized in different scenarios.
Establish A Governance Committee An internal Best Execution Committee or a similar governance body is a strategic necessity. This committee should be composed of senior staff from trading, compliance, risk, and technology. Its mandate is to review execution quality reports, oversee the venue selection process, and approve any material changes to the Best Execution Policy. The minutes of these meetings are a critical piece of evidence.
Systematic Venue And Broker Analysis The strategy requires a structured and repeatable process for evaluating all entities responsible for executing orders. This involves due diligence and ongoing monitoring of their performance, financial stability, and adherence to regulatory standards. This analysis provides the justification for the top execution venues that were previously disclosed in RTS 28 reports.

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The Quantitative Framework Measurement and Analysis

The quantitative pillar of the strategy is anchored in robust Transaction Cost Analysis (TCA). While RTS reports provided a high-level, aggregated view, modern TCA offers granular, trade-by-trade analysis that provides a much richer and more meaningful picture of execution quality. The strategy is to embed TCA into the entire trading workflow, from pre-trade analysis to post-trade reporting.

A successful strategy integrates a qualitative governance framework with a quantitative measurement system, using robust TCA to validate the decisions outlined in the Best Execution Policy.

Pre-trade TCA models can be used to estimate the expected cost and risk of different execution strategies, helping traders make more informed decisions. Real-time TCA can monitor orders as they are being worked, allowing for course corrections if market conditions change. Post-trade TCA is the critical component for evidencing best execution, as it provides the empirical data to assess whether the chosen strategy was effective. The strategy must involve the systematic capture and analysis of this data to identify trends, outliers, and areas for improvement.

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How Does Tca Replace Rts Reporting?

TCA provides a more nuanced and insightful view of execution performance than the old reporting regime ever could. Instead of simply listing the top five venues, a firm can now use TCA data to show why certain venues were chosen for specific types of orders and demonstrate that those choices led to superior results. For example, a firm can show that for large, illiquid orders, it routed to a specific dark pool or used a block trading RFQ protocol to minimize market impact, and it can present the TCA data (such as implementation shortfall) to prove the effectiveness of that decision.

The following table illustrates how different execution venues might be evaluated based on a set of qualitative and quantitative factors, forming a core part of the strategic analysis that underpins the Best Execution Policy.

Table 1 ▴ Execution Venue Strategic Analysis Matrix
Execution Venue Type	Primary Liquidity Profile	Key Quantitative Factors	Key Qualitative Factors	Optimal Use Case
Lit Exchange	Continuous, transparent order book	Low explicit costs (fees), high fill rates for small orders, fast execution speed.	High transparency, regulatory oversight, price discovery function.	Small-to-medium sized, liquid orders where speed and certainty of execution are primary.
Dark Pool / MTF	Non-displayed, block liquidity	Low price impact (slippage), potential for price improvement vs. lit market.	Reduced information leakage, potential for adverse selection, venue toxicity analysis required.	Large orders in liquid stocks where minimizing market impact is the primary goal.
Systematic Internaliser (SI)	Principal liquidity from a single dealer	No explicit exchange fees, potential for tight spreads.	Counterparty risk, potential for conflicts of interest, limited competition.	Retail and small institutional orders where cost certainty is a high priority.
Request for Quote (RFQ)	Targeted, bilateral liquidity	Competitive pricing from multiple dealers, ability to transfer risk.	Discreet execution, suitable for complex or illiquid instruments (e.g. options spreads).	Large block trades, derivatives, and illiquid assets requiring specialized liquidity.

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Execution

Executing a strategy to evidence best execution without RTS 27 and RTS 28 requires a disciplined, technology-driven, and procedurally sound operational framework. The focus shifts from producing a report to building a continuous, auditable process. This process must generate a comprehensive evidentiary file for each trading period, capable of satisfying regulatory inquiry and demonstrating a systematic approach to achieving the best possible client outcomes. The execution phase is about instrumenting the firm’s trading infrastructure to capture the right data and implementing governance workflows to analyze it effectively.

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The Operational Playbook for Building the Evidence File

The creation of a defensible best execution evidence file is a cyclical process involving policy setting, pre-trade analysis, real-time monitoring, post-trade analysis, and governance oversight. This playbook outlines the critical steps to operationalize the strategy.

Policy Codification The Best Execution Policy must be translated into the firm’s Order Management System (OMS) and Execution Management System (EMS) settings. This includes configuring smart order router (SOR) logic, default algorithmic strategies for different order types, and venue routing tables. The system’s configuration itself becomes a piece of evidence.
Pre-Trade Documentation For significant orders, particularly those requiring manual handling or block trading protocols like RFQ, traders must document their pre-trade analysis. This should include the rationale for the chosen strategy, the expected market impact, and the specific execution factors being prioritized. This can be logged directly within the EMS.
Systematic Data Capture The firm’s technology stack must be configured to capture a rich set of time-stamped data for every order. This includes the time the order was received, routed, acknowledged by the venue, executed, and filled. It must also capture all relevant parent and child order details, venue IDs, and execution prices.
Post-Trade TCA Generation On a daily or weekly basis, the captured trade data must be fed into a TCA system. This system should generate a standardized set of reports that analyze execution performance against various benchmarks (e.g. Arrival Price, VWAP, TWAP). These reports must be stored and archived for regulatory review.
Quarterly Governance Review The Best Execution Committee must meet quarterly to review the TCA reports. The committee’s role is to identify any systematic underperformance, question outlier trades, review the effectiveness of algorithmic strategies, and assess the performance of execution venues. The meeting minutes, action items, and follow-up analysis form a critical part of the evidentiary file.

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Quantitative Modeling and Data Analysis

The core of the execution process is the rigorous analysis of quantitative data. Firms must move beyond simple metrics and adopt a sophisticated approach to TCA that can tell a clear story about execution quality. This involves comparing execution costs against multiple benchmarks to provide a complete picture. For instance, comparing against the Arrival Price (implementation shortfall) measures the full cost of an order, while comparing against VWAP measures performance relative to the market’s average price during the execution period.

The evidentiary power of the new best execution framework lies in the ability to link documented strategic decisions to granular, quantitative outcomes measured by TCA.

The following table provides a sample TCA report for a set of hypothetical equity trades. This type of report is a cornerstone of the evidence file, allowing the firm to demonstrate its ability to measure and manage execution costs effectively. The analysis would involve drilling down into the outliers (like Trade 4) to understand the cause of the high slippage and document the findings.

Table 2 ▴ Sample Post-Trade Transaction Cost Analysis Report
Trade ID	Instrument	Side	Quantity	Strategy Used	Arrival Price (€)	Avg. Exec Price (€)	VWAP (€)	Slippage vs Arrival (bps)	Slippage vs VWAP (bps)
T001	Stock ABC	Buy	50,000	VWAP Algo	100.05	100.10	100.12	-5.00	+2.00
T002	Stock XYZ	Sell	10,000	SOR (Lit)	55.20	55.18	55.15	+3.62	-5.44
T003	Stock ABC	Buy	200,000	Dark Aggregator	100.25	100.28	100.35	-2.99	+6.98
T004	Stock QRS	Buy	5,000	Market Order	210.50	210.95	210.60	-21.38	-16.63
T005	Stock XYZ	Sell	150,000	RFQ	54.90	54.89	54.85	+1.82	-7.29

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How Do You Document Qualitative Factors?

Documenting the “softer” execution factors is a critical part of the process. This involves creating structured, evidence-based assessments. For example, the likelihood of execution for a venue can be quantified by tracking order fill rates and cancellation rates. Speed can be measured by analyzing latency from order routing to execution confirmation.

These quantitative metrics are then used to support the qualitative assessment in the venue analysis process. The output of this analysis, often in the form of a scorecard, should be reviewed and signed off by the Best Execution Committee, creating another formal piece of evidence that demonstrates a diligent and structured approach.

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References

European Securities and Markets Authority. “ESMA clarifies certain best execution reporting requirements under MiFID II.” ESMA, 13 Feb. 2024.
Malta Financial Services Authority. “The European Securities and Markets Authority (“ESMA”) Clarifies Certain Best Execution Reporting Requirements under MiFID II.” MFSA, 19 Feb. 2024.
Optiver. “A better way to measure best execution.” Optiver Insights, 8 Nov. 2021.
SALVUS Funds. “Best Execution in Practice and the new RTS 27/28 requirements.” SALVUS, 24 Oct. 2024.
Financial Conduct Authority. “Markets in Financial Instruments Directive II.” FCA, 2023.

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Reflection

The removal of a prescriptive reporting standard invites a period of introspection. It compels a firm to look inward at its own operational architecture and ask fundamental questions. Is your execution framework merely a collection of technologies and processes, or is it an integrated system capable of learning, adapting, and proving its own value?

The data required to demonstrate best execution already resides within your systems. The challenge is to architect the workflows, analytics, and governance protocols that can transform that raw data into a coherent and compelling narrative of diligence and performance.

Consider the resilience of your current framework. How would it perform under the scrutiny of a detailed regulatory examination? Can you, at a moment’s notice, retrieve the full lifecycle of any given order and articulate the rationale behind its handling?

The capacity to answer these questions with data-backed confidence is the new benchmark for excellence. This evolution represents an opportunity to build a more intelligent and effective execution system ▴ one that generates superior client outcomes and evidences its own integrity as an intrinsic function of its design.