How Do Firms Now Demonstrate Best Execution without Rts 28 Reports?

Concept

The removal of the mandatory RTS 28 reports represents a significant inflection point in the lifecycle of institutional trade execution. This development compels firms to re-evaluate their entire operational framework for demonstrating best execution. The core obligation to achieve the best possible result for clients remains steadfastly in place; what has changed is the mechanism for its verification.

The transition away from a prescriptive, report-centric compliance exercise toward a more principles-based, evidence-driven approach demands a higher order of internal diligence and analytical rigor. It is a shift from a culture of reporting to a culture of demonstrable quality.

At its heart, best execution is the duty for firms to take all sufficient steps to obtain the best possible result for their clients, considering factors like price, costs, speed, likelihood of execution, and size. The RTS 28 reports were a post-trade transparency tool designed to meet this obligation by requiring firms to publicly disclose their top five execution venues and a summary of the execution quality achieved. However, extensive feedback from market participants and regulators revealed that these reports were seldom used by end investors and failed to provide a meaningful basis for comparing execution quality across different firms. Their removal, therefore, is not a dilution of the principle but an acknowledgement of the tool’s ineffectiveness.

The fundamental duty of best execution persists; only the method of its demonstration has evolved, demanding a more robust, data-centric internal framework.

This new paradigm places the onus squarely on the firm to construct a coherent and defensible narrative of its execution practices. This narrative must be supported by a robust internal framework of policies, procedures, and data analysis. The firm’s execution policy becomes the central document, outlining the firm’s approach to achieving best execution across different asset classes and client types.

This policy is a living document, subject to regular review and adaptation in response to changing market conditions and internal performance analysis. The effectiveness of this policy, and the firm’s adherence to it, form the bedrock of demonstrating best execution in a post-RTS 28 world.

Strategy

In the absence of the prescriptive RTS 28 reporting framework, a firm’s strategy for demonstrating best execution must be rooted in a dynamic and multi-faceted approach. The core of this strategy is the establishment of a comprehensive and effective execution policy, which serves as the firm’s central governing document for all trading activities. This policy must be meticulously crafted to reflect the specific nature of the firm’s business, including the types of financial instruments traded, the characteristics of its client base, and the range of execution venues available. It is through the diligent implementation and regular review of this policy that a firm can build a credible and defensible case for its adherence to the principle of best execution.

The Centrality of the Execution Policy

A robust execution policy is the cornerstone of a modern best execution framework. It must clearly articulate the relative importance of the various execution factors, such as price, cost, speed, and likelihood of execution, for different types of orders and financial instruments. For instance, when executing a large, illiquid order, the likelihood of execution and minimizing market impact may take precedence over achieving the highest possible speed. Conversely, for a small, liquid order, price and speed might be the primary considerations.

The policy should also identify the specific execution venues and strategies that the firm will employ to achieve the best possible results for its clients. This includes a clear rationale for the selection of particular brokers, trading venues, or algorithmic trading strategies.

Governance and Oversight

Effective governance and oversight are critical components of a successful best execution strategy. Firms must establish a clear internal governance structure, with designated individuals or committees responsible for overseeing the firm’s execution arrangements. This governance body should be responsible for the following:

• Policy Review and Approval ▴ Regularly reviewing and updating the execution policy to ensure it remains fit for purpose.
• Monitoring Effectiveness ▴ Overseeing the firm’s monitoring of the effectiveness of its execution arrangements and policy.
• Remedial Action ▴ Ensuring that any identified deficiencies in the firm’s execution arrangements are promptly addressed.

This governance structure provides a clear line of accountability and ensures that best execution is embedded in the firm’s culture and operational processes.

The Role of Transaction Cost Analysis

Transaction Cost Analysis (TCA) has become an indispensable tool in the modern best execution framework. TCA provides a quantitative basis for assessing the quality of execution and identifying areas for improvement. By analyzing trading data against various benchmarks, firms can gain valuable insights into the effectiveness of their execution strategies and the performance of their chosen execution venues. A comprehensive TCA program should include pre-trade, intra-trade, and post-trade analysis.

Execution

The execution of a best execution framework in the absence of RTS 28 is a matter of meticulous documentation, rigorous analysis, and a commitment to continuous improvement. It requires a firm to move beyond a compliance-oriented mindset and embrace a data-driven approach to optimizing trading outcomes for its clients. This section provides a detailed playbook for implementing a robust best execution framework, including quantitative modeling, predictive scenario analysis, and system integration considerations.

The Operational Playbook

A firm’s operational playbook for best execution should be a comprehensive guide that outlines the specific steps and procedures for ensuring and demonstrating compliance with the best execution obligation. This playbook should be tailored to the firm’s specific business model and should be regularly reviewed and updated.

1. Establish a Best Execution Committee ▴ This committee should be composed of senior management from across the firm, including trading, compliance, and risk. The committee’s mandate should be to oversee the firm’s best execution arrangements, review TCA reports, and approve any changes to the execution policy.
2. Develop a Comprehensive Execution Policy ▴ The execution policy should be the central document of the firm’s best execution framework. It should clearly articulate the firm’s approach to best execution for different asset classes, client types, and order types. The policy should also identify the specific execution venues and strategies that the firm will use to achieve the best possible results for its clients.
3. Implement a Robust TCA Program ▴ The firm should implement a comprehensive TCA program that includes pre-trade, intra-trade, and post-trade analysis. The TCA program should be used to monitor the effectiveness of the firm’s execution arrangements and to identify areas for improvement.
4. Document Everything ▴ In a post-RTS 28 world, documentation is paramount. Firms must maintain detailed records of all trades, including the time the order was received, the time it was executed, the execution venue, the price, and the costs. They must also document the rationale for any decisions made regarding the execution of an order, particularly for large or complex trades.

Quantitative Modeling and Data Analysis

Quantitative modeling and data analysis are the bedrock of a modern best execution framework. By leveraging data, firms can move from a subjective assessment of execution quality to an objective, evidence-based approach. The following table provides an example of how a firm might use TCA to compare the performance of two different brokers for a specific type of order.

A principles-based best execution framework shifts the focus from rote compliance to a continuous, data-driven quest for superior execution quality.

Predictive Scenario Analysis

Consider a scenario where an asset manager needs to execute a large order for a thinly traded stock. In a post-RTS 28 world, the firm’s process for demonstrating best execution would be as follows:

• Pre-Trade Analysis ▴ The portfolio manager would use a pre-trade analytics tool to estimate the potential market impact of the order. The tool might suggest that executing the order in a single block would result in significant price slippage. Based on this analysis, the portfolio manager decides to use an algorithmic trading strategy, such as a VWAP algorithm, to break the order up into smaller pieces and execute it over the course of the day.
• Venue Selection ▴ The firm’s execution policy would outline the approved execution venues for this type of order. The algorithmic trading strategy would be configured to route the order to a variety of lit and dark venues in order to access the maximum amount of liquidity while minimizing market impact.
• Intra-Trade Monitoring ▴ The trading desk would monitor the execution of the order in real-time, using an EMS to track the performance of the algorithm against the VWAP benchmark. If the algorithm is deviating significantly from the benchmark, the trader may intervene and adjust the trading strategy.
• Post-Trade Analysis ▴ Once the order is complete, a post-trade TCA report would be generated. The report would compare the execution price to a variety of benchmarks, including the arrival price, the VWAP, and the implementation shortfall. The report would also provide a detailed breakdown of the costs associated with the trade, including commissions and fees. This report, along with the pre-trade analysis and a record of the intra-trade monitoring, would serve as the firm’s evidence that it took all sufficient steps to achieve the best possible result for the client.

System Integration and Technological Architecture

A robust technological architecture is essential for supporting a modern best execution framework. The key components of this architecture include:

• Order Management System (OMS) ▴ The OMS is the central repository for all order data. It should be configured to capture all of the information necessary for TCA, including the time the order was received, the order type, the limit price, and any special instructions.
• Execution Management System (EMS) ▴ The EMS is used to manage the execution of orders. It should provide access to a wide range of execution venues and algorithmic trading strategies. The EMS should also provide real-time monitoring capabilities, allowing traders to track the performance of their orders against various benchmarks.
• Transaction Cost Analysis (TCA) Platform ▴ The TCA platform is used to analyze trading data and generate reports on execution quality. The platform should be able to consume data from the OMS and EMS and should provide a variety of analytical tools and benchmarks.

These systems must be tightly integrated to ensure a seamless flow of data from order creation to post-trade analysis. The use of industry-standard protocols, such as the Financial Information eXchange (FIX) protocol, is essential for achieving this integration. The FIX protocol provides a standardized format for communicating trade-related information, ensuring that data can be easily exchanged between different systems and counterparties.

Reflection

The transition away from RTS 28 reporting marks a pivotal moment for institutional finance. It presents an opportunity to move beyond a compliance-driven exercise and cultivate a deeper, more meaningful commitment to the principles of best execution. This shift demands a more sophisticated and data-centric approach, one that is grounded in a robust internal framework of policies, procedures, and analytics. The firms that will thrive in this new environment are those that view best execution not as a regulatory burden, but as a source of competitive advantage.

By embracing a culture of continuous improvement and leveraging the power of data, firms can enhance their trading performance, reduce their costs, and ultimately, deliver better outcomes for their clients. The end of RTS 28 is not the end of the story; it is the beginning of a new chapter in the evolution of best execution.