How Should a Best Execution Committee Use RTS 27 and RTS 28 Reports to Evaluate SI Performance?

Concept

The mandate of a Best Execution Committee extends beyond mere compliance; it is the central nervous system for ensuring a firm’s trading apparatus serves its clients’ ultimate interests. The introduction of Regulatory Technical Standards (RTS) 27 and 28 under MiFID II provided committees with a new, albeit complex, stream of data. The challenge, however, lies in transforming these mandated disclosures from a regulatory burden into a potent analytical tool.

For a Systematic Internaliser (SI), which operates as a private liquidity venue, this scrutiny is particularly acute. The committee’s function is to dissect the performance of these SIs, moving beyond their convenience to quantitatively and qualitatively validate their efficacy against the broader market.

At its heart, the evaluation process is an exercise in comparative analysis. An SI’s performance cannot be judged in a vacuum. The data furnished by RTS 27 reports, published by the SIs themselves, provides a granular view of their execution quality, detailing metrics like price, speed, and likelihood of execution. Concurrently, the firm’s own RTS 28 report summarizes its top execution venues, including SIs, and offers a qualitative assessment of how execution was achieved.

The committee’s primary role is to synthesize these two distinct but interconnected reports. This synthesis allows for a rigorous, evidence-based assessment of whether the SI is genuinely providing competitive execution or simply capturing flow for its own benefit.

The core function of the committee is to translate the raw data from RTS 27 and RTS 28 reports into a coherent narrative about execution quality, enabling informed decisions about venue selection.

This process is not a one-time event but a continuous feedback loop. The insights gleaned from analyzing these reports must inform the firm’s order routing policies and its overall execution strategy. A failure to properly utilize this information exposes the firm to regulatory risk and, more critically, represents a dereliction of its fiduciary duty to clients. The committee, therefore, acts as the crucial bridge between regulatory data and strategic action, ensuring that the firm’s execution practices are not just compliant, but demonstrably optimal.

Strategy

A Framework for Diligent Oversight

A Best Execution Committee must devise a systematic strategy to harness RTS 27 and RTS 28 reports for evaluating Systematic Internaliser (SI) performance. This strategy should be built on a foundation of clear metrics, comparative analysis, and qualitative judgment. The initial step involves defining the firm’s own best execution policy in precise, quantifiable terms.

The factors listed in Article 27 of MiFID II ▴ price, costs, speed, and likelihood of execution ▴ must be weighted according to the firm’s client base and trading profile. This internal benchmark becomes the yardstick against which all execution venues, including SIs, are measured.

The next phase of the strategy is data aggregation and normalization. RTS 27 reports, while rich in detail, are notoriously inconsistent in format across different venues. The committee must establish a process for ingesting this data, ideally in a machine-readable format, to allow for like-for-like comparisons. This may require technological investment in data parsing and analysis tools.

Once the data is structured, the committee can begin to build a performance scorecard for each SI, tracking key metrics over time. This historical perspective is vital for identifying trends, performance degradation, or improvements.

Comparative Analysis the Core Discipline

The essence of the evaluation strategy lies in a rigorous comparative analysis. The performance of an SI, as detailed in its RTS 27 report, must be benchmarked against other execution venues. This includes other SIs, regulated markets, and multilateral trading facilities (MTFs). The committee should focus on several key comparative questions:

• Price Improvement ▴ Does the SI consistently offer prices better than the prevailing market bid or offer? How does this compare to the price improvement statistics from other venues for similar instruments?
• Effective Spread ▴ What is the effective spread for transactions on the SI? A narrower effective spread is a strong indicator of execution quality.
• Execution Speed ▴ How quickly are orders executed on the SI? While speed is important, it must be balanced against price and other factors.
• Likelihood of Execution ▴ What percentage of orders sent to the SI are successfully executed? A high failure rate may indicate liquidity issues or overly aggressive pricing.

The firm’s own RTS 28 report provides a crucial layer of context for this analysis. This report details the top five venues where the firm executed client orders and includes a qualitative summary of the execution quality achieved. The committee must cross-reference this report with the quantitative data from the RTS 27 reports. For example, if an SI is listed as a top-five venue in the RTS 28 report, the committee must be able to point to specific data in the SI’s RTS 27 report that justifies this ranking.

A robust strategy for SI evaluation hinges on the committee’s ability to benchmark the quantitative data from RTS 27 reports against the firm’s own execution outcomes as documented in its RTS 28 report.

The following table illustrates how a committee might structure a high-level comparison between an SI and another execution venue, using hypothetical data derived from RTS 27 reports.

Qualitative Overlay and Governance

The final element of the strategy is the qualitative overlay. The numbers alone do not tell the whole story. The committee must consider other factors, such as the nature of the SI’s business model, potential conflicts of interest, and the quality of the client service relationship. The qualitative summary within the RTS 28 report is the formal articulation of this judgment.

It should explain why the firm chooses to route orders to certain venues, linking the decision back to the firm’s execution policy and the data analysis performed. This qualitative assessment, backed by rigorous quantitative evidence, forms the backbone of a defensible and effective best execution governance framework.

Execution

Operationalizing the Evaluation Process

The execution of a robust evaluation process for Systematic Internalisers (SIs) requires a formal, repeatable, and well-documented procedure for the Best Execution Committee. This process translates the strategy into a series of concrete actions, ensuring that the analysis of RTS 27 and RTS 28 reports is both thorough and consistent. The committee should establish a regular meeting schedule, at least quarterly, to review SI performance. Each review should follow a structured agenda, beginning with the acquisition and preparation of the relevant data.

The first operational step is the systematic collection of RTS 27 reports from all SIs the firm uses or is considering using. Given the lack of a standardized format, this often requires a dedicated effort to parse the reports into a common data structure. The committee should mandate the creation of a centralized database to house this information, allowing for trend analysis and historical comparisons.

The data should be cleaned and validated to ensure accuracy. Once the RTS 27 data is prepared, it must be integrated with the firm’s own internal execution data and the information being compiled for the annual RTS 28 report.

Deep Dive into RTS 27 Metrics

The core of the execution phase is a granular analysis of the key performance indicators within the RTS 27 reports. The committee should move beyond high-level summaries and engage with the specifics of the data. The following metrics are of particular importance when evaluating an SI:

• Price Analysis ▴ This involves a detailed examination of the price improvement metrics provided in the RTS 27 report. The committee should look at the percentage of orders that receive price improvement, the average improvement per share, and how these figures vary by instrument and order size.
• Cost Analysis ▴ The committee must assess both explicit and implicit costs. Explicit costs, such as fees, should be clearly understood. Implicit costs, which are often more significant, can be gauged by analyzing the effective and quoted spreads reported by the SI.
• Speed of Execution ▴ The RTS 27 report provides data on the speed of execution, typically measured in milliseconds. The committee should analyze this data to understand the latency of the SI’s systems and whether it meets the firm’s requirements, particularly for latency-sensitive strategies.
• Likelihood of Execution ▴ This metric, which details the probability of an order being executed, is a critical indicator of the SI’s reliability and liquidity. The committee should investigate any instances of high order rejection rates.

The following table provides a more detailed, hypothetical example of the kind of data the committee should be extracting and analyzing from an SI’s RTS 27 report for a specific equity instrument.

The practical application of oversight involves translating the complex data tables of RTS 27 into a clear performance narrative for each systematic internaliser.

Synthesizing with RTS 28 and Driving Action

The final step in the execution process is to synthesize the findings from the RTS 27 analysis with the firm’s own RTS 28 report. The RTS 28 report is the public-facing document that attests to the quality of the firm’s execution practices. The committee must ensure that the selection of top execution venues, as disclosed in the RTS 28 report, is fully supported by the quantitative evidence gathered from the RTS 27 reports. Any discrepancies must be investigated and resolved.

This synthesis should lead to concrete actions. If an SI is found to be underperforming, the committee must decide on a course of action. This could range from engaging with the SI to address the performance issues, to reducing the amount of order flow directed to that venue, or, in severe cases, ceasing to use the SI altogether. These decisions, and the evidence supporting them, must be meticulously documented in the committee’s meeting minutes.

This documentation is crucial for demonstrating to regulators that the firm has a dynamic and effective best execution process in place. The cycle then repeats, with the committee continuously monitoring, evaluating, and acting upon the data to fulfill its critical oversight function.

Reflection

From Data Compliance to Systemic Intelligence

The rigorous analysis of RTS 27 and RTS 28 reports transforms a regulatory requirement into a source of profound market intelligence. For a Best Execution Committee, the process detailed here represents a shift in perspective. It moves the committee’s function from a passive, compliance-oriented role to an active, strategic one. The data, once unlocked, provides a high-resolution map of the execution landscape, revealing the subtle contours of liquidity, cost, and efficiency that differentiate one venue from another.

This framework is not merely a set of procedures; it is an operating system for execution oversight. Its successful implementation fosters a culture of empirical decision-making, where choices about order routing are dictated by evidence rather than by habit or convenience. The ultimate value of this system lies in its dynamic nature. Markets evolve, new technologies emerge, and the performance of execution venues can change.

A committee that has mastered this analytical process is equipped to navigate these changes, continuously refining its execution strategy to secure the best possible outcomes for its clients. The question, therefore, is not whether your committee can process these reports, but whether it can harness them to build a durable, systemic advantage.