How Do Firms Now Demonstrate Best Execution without RTS 27 Reports?

Concept

The operational landscape of institutional finance has undergone a significant recalibration following the suspension of the Regulatory Technical Standard (RTS) 27 reporting requirement. This development did not create a vacuum in regulatory expectations; on the contrary, it signaled a pivotal shift in how execution quality is defined, measured, and substantiated. The core obligation for investment firms to secure the best possible result for their clients remains an immovable pillar of the MiFID II framework. The change lies in the methodology of proof.

The focus has migrated from a compliance model centered on the production of vast, standardized public data sets to an internalized, evidence-driven discipline. This new paradigm demands a more sophisticated and dynamic system of internal governance, continuous monitoring, and robust analytical justification.

At its heart, this evolution represents a move toward a more meaningful demonstration of diligence. The RTS 27 reports, while conceived with transparent intentions, were widely criticized by market participants for being cumbersome to produce and difficult to interpret, often presenting fragmented data that failed to provide a clear picture of execution quality. Their suspension has cleared the way for firms to architect internal frameworks that are genuinely reflective of their unique order flow, strategic objectives, and client obligations.

The responsibility now is to construct and maintain a comprehensive internal system that not only satisfies regulatory scrutiny but also serves as a source of competitive differentiation. This system must be capable of demonstrating, with empirical rigor, that every phase of the execution lifecycle is optimized.

The Redefined Mandate for Execution Quality

Best execution is an outcome derived from a multi-faceted process, not a singular focus on achieving the lowest price. The MiFID II directive itself specifies a range of execution factors that firms must consider. These include not only price and costs but also speed, likelihood of execution and settlement, size, nature of the order, and any other consideration relevant to the execution of the order.

The current environment compels firms to move beyond a check-the-box approach and to embed a holistic assessment of these factors into their operational DNA. This requires a qualitative overlay on quantitative data, creating a narrative that explains the “why” behind every routing decision.

The core of this new model is the firm’s own internal Execution Quality Framework. This is the central nervous system that connects policy, technology, analysis, and governance. It is a living system, not a static document. It must be capable of ingesting vast amounts of market and execution data, analyzing it against defined benchmarks, and producing actionable intelligence.

This intelligence is then used to refine trading strategies, optimize algorithmic parameters, and hold execution venues accountable. The framework provides the structure through which a firm can prove, at any given moment, that it is taking all sufficient steps to achieve the best possible result for its clients. The suspension of RTS 27, therefore, was not a relaxation of standards but a challenge to the industry to develop more intelligent, effective, and tailored methods of proving its commitment to them.

Strategy

In the absence of the prescriptive RTS 27 reporting regime, a firm’s strategy for demonstrating best execution must be deliberate, systematic, and deeply integrated into its trading infrastructure. The strategic imperative is to build a defensible and continuously improving execution process. This process must be transparent to both clients and regulators, grounded in empirical data, and governed by a clear set of principles. The architecture of this strategy rests on several interdependent pillars, each reinforcing the others to create a robust and comprehensive system for managing and evidencing execution quality.

The strategic framework for demonstrating best execution has shifted from public reporting to a sophisticated internal system of continuous analysis, governance, and evidence collection.

The Order Execution Policy as the Foundational Blueprint

The single most important document in this framework is the firm’s Order Execution Policy (OEP). This is not a static compliance document but the foundational blueprint that dictates how a firm will deliver on its best execution obligation. The OEP must be a detailed, precise, and practical guide that clearly articulates the firm’s approach for each class of financial instrument. It must explain the relative importance of the different execution factors and describe the process by which the firm determines the optimal execution strategy for a given client order.

A well-architected OEP will specify the following:

• Execution Venues ▴ A comprehensive list of the execution venues (such as regulated markets, multilateral trading facilities, systematic internalisers, and third-party brokers) that the firm relies on, along with a clear justification for their inclusion.
• Execution Factors ▴ A detailed explanation of how the firm prioritizes the various execution factors (price, costs, speed, likelihood of execution, etc.) for different types of orders, clients, and financial instruments. For instance, for a large, illiquid order, likelihood of execution and minimizing market impact might take precedence over raw speed.
• Algorithmic Strategies ▴ For firms employing algorithmic trading, the OEP must outline the suite of algorithms used and the logic governing their selection for specific scenarios.
• Monitoring and Review Process ▴ The policy must describe the procedures for monitoring the effectiveness of the execution arrangements and the process for reviewing and updating the policy itself to adapt to market changes or internal findings.

Transaction Cost Analysis the Core Analytical Engine

If the OEP is the blueprint, Transaction Cost Analysis (TCA) is the primary analytical engine used to measure the performance of the constructed machinery. TCA provides the quantitative evidence of execution quality. It moves beyond simple price comparisons to offer a nuanced evaluation of trading performance against a variety of benchmarks. A sophisticated TCA strategy is continuous, covering pre-trade, intra-trade, and post-trade phases.

• Pre-trade analysis involves assessing the likely market impact and cost of a potential trade, allowing traders to select the most appropriate execution strategy and algorithm.
• Intra-trade monitoring provides real-time feedback on execution performance, allowing for adjustments to be made on the fly.
• Post-trade analysis is the critical review phase, where actual execution costs are compared against benchmarks to evaluate the effectiveness of the chosen strategy, venue, and algorithm.

The choice of benchmark is critical for meaningful analysis. Different benchmarks tell different stories, and a robust TCA framework will utilize multiple benchmarks to build a complete picture of performance.

The Governance Structure Best Execution Committees

Data and analysis are only valuable if they are subject to rigorous oversight and lead to concrete action. This is the role of the Best Execution Committee or a similarly mandated governance body. This committee is responsible for the systematic review of the firm’s execution performance. It should be composed of senior staff from across relevant functions, including trading, compliance, risk, and technology.

The committee’s mandate typically includes:

• Reviewing regular TCA reports and other management information to assess the effectiveness of the firm’s execution arrangements.
• Investigating any identified deficiencies or instances of poor performance.
• Approving the selection of execution venues and brokers.
• Overseeing the annual review and update of the Order Execution Policy.
• Ensuring that the firm’s execution practices remain aligned with regulatory requirements and client interests.

The minutes and findings of these committee meetings form a critical part of the evidentiary record, demonstrating a culture of active oversight and continuous improvement. This documented governance process shows regulators that the firm is not just passively collecting data, but actively using it to challenge and refine its execution strategy.

The Lingering Importance of RTS 28

While RTS 27 reports from venues are suspended, the obligation for investment firms to produce RTS 28 reports remains in many jurisdictions. This report requires firms to publish an annual summary of the top five execution venues used for each class of financial instrument, along with a summary of the quality of execution obtained. RTS 28 serves a different purpose than RTS 27. It is a client-facing disclosure designed to provide transparency on where a firm routes its orders and the outcomes achieved.

It forces firms to publicly stand behind their venue selection and execution quality. Strategically, the preparation of the RTS 28 report should be a natural output of the internal TCA and governance framework. The data and analysis used to populate the report should be the same data that the Best Execution Committee reviews throughout the year, ensuring consistency between internal oversight and external disclosure.

Execution

The execution of a best execution framework in the post-RTS 27 era is a matter of operationalizing strategy through a disciplined, technology-enabled, and continuous process. It is about creating a feedback loop where data informs decisions, decisions are executed through robust systems, and the outcomes are rigorously analyzed to refine future strategy. This is where the theoretical commitments of the Order Execution Policy are translated into tangible actions and measurable results. The entire process must be auditable, transparent, and designed for continuous improvement.

The Operational Playbook a Continuous Monitoring Cycle

Demonstrating best execution is not a point-in-time assessment but a continuous, cyclical process. Each stage of the cycle generates data and insights that feed into the next, creating a powerful engine for optimization. This operational playbook can be broken down into a series of interconnected steps.

1. Pre-Trade Analysis and Strategy Selection ▴ Before an order is placed, a pre-trade analysis must be conducted. For larger or more complex orders, this involves using TCA tools to estimate potential market impact, forecast volatility, and model execution costs under various scenarios. Based on this analysis, the trader selects the most appropriate execution strategy and algorithm, aligning with the principles laid out in the OEP. This decision, and the rationale behind it, should be logged.
2. Systematic Order Routing ▴ The chosen strategy is then implemented through the firm’s Execution Management System (EMS) and Smart Order Router (SOR). The SOR’s logic must be configured to reflect the venue preferences and execution priorities defined in the OEP. It systematically routes child orders to the optimal venues based on real-time market data, seeking liquidity and prioritizing factors like price, speed, and fill probability according to its programming.
3. Intra-Trade Monitoring ▴ While the order is being worked, it is monitored in real time against the chosen benchmark. The EMS should provide alerts if the execution is deviating significantly from expected performance (e.g. high slippage against arrival price). This allows the trader to intervene, adjust the algorithm’s parameters, or change the strategy if market conditions shift unexpectedly.
4. Post-Trade Data Capture and TCA ▴ Once the order is complete, all relevant execution data is captured. This includes every fill, the venue it occurred on, the timestamp, the price, and the associated fees. This data is fed into the TCA system, which runs a comprehensive analysis comparing the execution against multiple benchmarks (Arrival Price, VWAP, etc.). The output is a detailed report that quantifies every aspect of the execution’s performance.
5. Exception Reporting and Investigation ▴ The TCA system automatically flags executions that fall outside predefined performance thresholds. These “exceptions” trigger a formal investigation. An analyst must determine the root cause of the poor performance. Was it due to adverse market conditions, a suboptimal algorithm choice, poor venue performance, or another factor? This investigation combines quantitative data with qualitative insights from the trader.
6. Governance and Committee Review ▴ The aggregated TCA reports, along with detailed findings from exception investigations, are presented to the Best Execution Committee. The committee reviews the performance of different venues, brokers, and algorithms. They look for systemic patterns, positive or negative, and make strategic decisions based on the evidence.
7. The Critical Feedback Loop ▴ The conclusions from the committee review are then used to drive improvements. This could involve removing an underperforming venue from the SOR’s rotation, adjusting the parameters of a trading algorithm, providing additional training to the trading desk, or, most importantly, amending the Order Execution Policy to reflect the new findings. This closes the loop, ensuring the entire system learns and adapts.

The core of execution is a disciplined, data-driven feedback loop where post-trade analysis directly informs and refines pre-trade strategy.

Quantitative Modeling and Data Analysis

The quantitative rigor of the execution framework hinges on the quality of its data and the sophistication of its analysis. A granular, multi-dimensional view of execution data is essential for uncovering actionable insights. The following table provides a simplified example of the kind of data that a firm’s TCA system would analyze to compare venue and algorithm performance.

In this analysis, metrics like Implementation Shortfall provide a holistic view of cost from the decision time. Slippage vs. VWAP shows performance against a participation benchmark. A key metric here is Reversion, which measures post-trade price movements.

A high negative reversion (like in trades T003 and T006) suggests the execution had a significant market impact, pushing the price temporarily, which then “reverted” after the trade was complete. This is a strong indicator of high implicit costs and is a critical focus for the Best Execution Committee. The analysis of this data allows the committee to ask pointed questions ▴ Why is the IS algorithm showing high reversion on Venue A for mid-cap stocks? Is Venue B a better choice for passive VWAP strategies? This data-driven inquiry is the essence of modern best execution oversight.

System Integration and Technological Architecture

This entire operational playbook is underpinned by a deeply integrated technological architecture. The seamless flow of data between systems is paramount.
The process begins in the Order Management System (OMS), where the portfolio manager creates the initial order. This order is passed, often via the Financial Information eXchange (FIX) protocol, to the trader’s Execution Management System (EMS). The EMS is the trader’s cockpit, providing access to pre-trade analytics, algorithms, and real-time market data.
When the trader executes the order, the EMS and its integrated Smart Order Router (SOR) take over, breaking the parent order into child orders and routing them to various execution venues according to the SOR’s logic.

Each venue acknowledges the order and, upon execution, sends a fill report back via FIX.
These execution reports, containing the granular details of every fill, are captured by the firm’s data warehouse. It is this repository of execution data that the Transaction Cost Analysis (TCA) system queries. The TCA system, which can be an in-house build or a service from a specialized vendor, enriches the firm’s execution data with market data for the corresponding period. It then runs the calculations to generate the performance reports.
The output from the TCA system is then fed into a business intelligence or reporting tool, which creates the dashboards and detailed reports for review by the compliance team and the Best Execution Committee.

The findings from this review then flow back to the teams responsible for configuring the EMS and SOR, creating the all-important feedback loop. This technological chain ensures that every decision is data-driven and every outcome is measured, forming an unbroken, auditable trail of the firm’s efforts to achieve best execution.

Reflection

From Mandated Report to Internal Discipline

The transition away from RTS 27 reporting marks a maturation of the regulatory philosophy surrounding execution quality. It reflects an understanding that true diligence cannot be fully captured in a standardized, one-size-fits-all data dump. The mandate has been internalized. The question for every firm is no longer “Have we produced the report?” but “Is our internal system of analysis, governance, and optimization sufficiently robust to withstand scrutiny and, more importantly, to deliver a persistent execution advantage?”

This shift compels a deep introspection of a firm’s operational framework. It demands an honest assessment of whether existing systems are merely designed for compliance or architected for performance. A framework built solely to satisfy a legacy reporting requirement is fragile. A framework designed as a continuous, integrated system of intelligence ▴ one that learns from every trade and refines its own logic ▴ is resilient.

The absence of a public reporting mandate is not a void, but an opportunity to build a proprietary system of execution quality management that becomes a core component of the firm’s value proposition. The ultimate measure of success is an execution process that is not only defensible to regulators but is a source of measurable, repeatable value for clients.