What Are the Core Differences between MiFID I and MiFID II regarding Best Execution Requirements? ▴ Question

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Concept

The transition from the Markets in Financial Instruments Directive (MiFID I) to its successor, MiFID II, represents a fundamental recalibration of the principles governing European financial markets. At the heart of this evolution lies the doctrine of best execution, a concept that underwent significant reinforcement. The initial framework under MiFID I required firms to take “all reasonable steps” to obtain the best possible result for their clients.

This standard, while foundational, left room for considerable interpretation, allowing firms to define their own processes for achieving what they deemed a favorable outcome. The subsequent implementation of MiFID II on January 3, 2018, introduced a more stringent and demonstrably rigorous standard.

The core impetus for this regulatory enhancement was the 2008 financial crisis, which exposed certain weaknesses and a lack of transparency across securities markets. Regulators perceived a need to move beyond a principles-based approach to one that was more prescriptive, data-driven, and verifiable. MiFID II replaced the “all reasonable steps” clause with the mandate to take “all sufficient steps.” This seemingly subtle change in wording imposes a much higher standard of compliance, shifting the onus onto investment firms to not only design a robust execution policy but also to prove its effectiveness through quantitative data and continuous monitoring.

It marked a move from a subjective assessment of effort to an objective, evidence-based validation of outcomes. The new regime compels firms to strengthen front-office accountability and implement exacting systems and controls to identify and remedy any deficiencies in execution quality.

The shift from “reasonable” to “sufficient” steps fundamentally altered the best execution obligation from a procedural exercise to a mandate for demonstrable, data-driven proof of optimal client outcomes.

Furthermore, the scope of the best execution obligation was substantially broadened. While MiFID I’s principles applied to all financial instruments in theory, the practical application and data availability were largely confined to equities. MiFID II explicitly extended the rigorous best execution standards to a wider array of asset classes, including bonds, structured finance products, and derivatives.

This expansion necessitated a far more granular approach, requiring firms to tailor their execution policies to the specific characteristics of each instrument class and the diverse execution venues where they are traded. The directive now demands a clear, detailed, and easily understood execution policy that explains precisely how orders will be handled for the client, a direct response to regulatory findings that earlier policies were often too generic.

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Strategy

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From Principle to Prescription a New Execution Philosophy

The strategic recalibration from MiFID I to MiFID II required investment firms to dismantle and re-engineer their entire approach to order handling. The change from “reasonable” to “sufficient” steps was the philosophical epicenter of this shift, compelling a move from a process-oriented defense to a results-oriented, empirical validation. Under MiFID I, a firm could often satisfy its obligation by demonstrating it had followed its internal execution policy.

MiFID II, conversely, demands that the policy itself is proven to be effective and that the outcomes are consistently monitored and optimized. This necessitates a robust feedback loop where execution data is continuously analyzed to refine the firm’s strategy, including its choice of execution venues.

A primary strategic adjustment involved the explicit elevation of cost and price in the hierarchy of execution factors. While MiFID I listed several factors for consideration (price, costs, speed, likelihood of execution, etc.), MiFID II clarified their relative importance. For retail clients, the “total consideration,” representing the combination of the instrument’s price and all associated execution costs, became the paramount factor.

This includes not just explicit execution fees but also less obvious charges like settlement fees or market data fees. This focus on total cost requires firms to develop a more sophisticated and transparent accounting of all expenses passed on to the client, moving beyond just the headline price of an asset.

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Expanding the Execution Universe

Another critical strategic evolution was the formal expansion of the types of execution venues that firms must consider. MiFID I acknowledged regulated markets and Multilateral Trading Facilities (MTFs). MiFID II broadened this landscape considerably to include Organised Trading Facilities (OTFs), Systematic Internalisers (SIs), and other liquidity providers.

This expansion reflects the increasing fragmentation of liquidity across different platforms and obliges firms to look beyond traditional exchanges to source the best possible outcomes for their clients. An execution policy under MiFID II must therefore provide a detailed account of the different venues used for each class of financial instrument and rigorously justify the selection criteria.

MiFID II mandates a strategic pivot towards proactive, data-driven venue analysis and selection, replacing the more passive, policy-based approach of its predecessor.

The table below outlines the core strategic shifts between the two directives, illustrating the increased granularity and accountability required under the new regime.

Table 1 ▴ Strategic Comparison of MiFID I and MiFID II Best Execution
Core Aspect	MiFID I Standard	MiFID II Standard
Overarching Obligation	Take all reasonable steps to obtain the best possible result.	Take all sufficient steps to obtain the best possible result.
Instrument Scope	Primarily focused on equities due to data availability.	Explicitly covers all asset classes, including equities, bonds, derivatives, and structured products.
Cost Consideration	Costs are a factor, but with less specific guidance on their calculation.	Emphasis on “total consideration” (price + all costs) as the primary determinant for retail clients.
Execution Venues	Consideration of regulated markets and MTFs.	Expanded to include OTFs, Systematic Internalisers, and other liquidity providers.
Policy Requirements	A general order execution policy is required.	Policies must be customized by financial instrument class and provide detailed information on venue selection.
Proof of Compliance	Focus on demonstrating that established procedures were followed.	Focus on demonstrating, with quantitative data, that the procedures produce the best possible results.

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Execution

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The Mandate for Data Driven Proof

The execution of a best execution policy under MiFID II is fundamentally a data-centric operation. The directive moved the process from a qualitative assessment to a quantitative, evidence-based discipline through the introduction of specific regulatory technical standards (RTS). The most significant of these are RTS 27 and RTS 28, which together create a transparent ecosystem for evaluating execution quality. These reports are not merely bureaucratic filings; they are the primary mechanisms through which firms must demonstrate compliance with the “all sufficient steps” mandate.

RTS 27 reports are the responsibility of execution venues, including trading venues like regulated markets and MTFs, as well as market makers and other liquidity providers. These quarterly reports provide detailed, standardized data on the quality of execution achieved on that venue. The objective is to create a public, comparable dataset that investment firms can use to conduct their own analysis and make informed decisions about where to route client orders. The level of detail required is substantial, covering everything from execution prices and costs to the likelihood and speed of execution for individual financial instruments.

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RTS 28 the Firm’s Public Declaration of Execution Quality

While RTS 27 provides the raw material, RTS 28 is the finished product of a firm’s internal analysis. Annually, investment firms must publish an RTS 28 report detailing the top five execution venues they used for each class of financial instrument. This report is a public disclosure of their execution practices. It must include both quantitative and qualitative information.

The firm must present a summary of its analysis and the conclusions it has drawn from its continuous monitoring of execution quality. This qualitative summary must explain how the firm has used the data, including information from RTS 27 reports, to refine its execution strategies and venue selection over the preceding year.

The operational requirements for producing an RTS 28 report are extensive. Firms must:

Collect and Consolidate Data ▴ Gather vast amounts of trade data across all asset classes and execution venues.
Analyze Venue Performance ▴ Use the collected data, supplemented by public RTS 27 data, to evaluate the performance of each venue against the defined execution factors.
Justify Venue Selection ▴ The report must clearly explain the rationale for choosing the top five venues, linking the decision back to the overarching goal of achieving the best possible result for clients.
Disclose Conflicts of Interest ▴ Firms must be transparent about any close links, conflicts of interest, or common ownership with respect to the execution venues used.
Detail Payments ▴ Any payments received from or made to execution venues (rebates, etc.) must be disclosed to ensure transparency around potential inducements.

The following table provides a simplified illustration of the data points required within an RTS 28 report for a specific class of financial instrument.

Table 2 ▴ Illustrative Data for RTS 28 Report (Equities ▴ Large Cap)
Execution Venue Name	Proportion of Volume	Proportion of Orders	Percentage of Passive Orders	Percentage of Aggressive Orders	Evidence of Best Execution
Venue A (Regulated Market)	45%	40%	60%	40%	Primary venue for deep liquidity and price formation; consistently low effective spreads.
Venue B (MTF)	25%	30%	50%	50%	Selected for speed of execution and lower explicit costs for smaller order sizes.
Venue C (Systematic Internaliser)	15%	15%	N/A	N/A	Utilized for large-in-scale orders to minimize market impact; provides price improvement.
Venue D (MTF – Dark Pool)	10%	10%	100%	0%	Used for passive block orders to source non-displayed liquidity and reduce information leakage.
Venue E (Broker Algo)	5%	5%	N/A	N/A	Employed for specific strategies requiring access to a consolidated order book across multiple venues.

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Governance and Oversight a Structural Imperative

Beyond data reporting, MiFID II imposes stringent governance requirements. Firms must establish a formal, accountable oversight function responsible for the best execution policy. This function, often situated within a compliance or risk management framework, is tasked with the regular review and challenge of the firm’s execution arrangements.

The policy cannot be a static document; it must be a living framework that adapts to changes in market structure, the emergence of new liquidity sources, and the results of ongoing performance monitoring. This requires a clear chain of command and accountability, ensuring that senior management is ultimately responsible for demonstrating that the firm is consistently delivering the best possible outcomes for its clients.

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References

Dechert LLP. “MiFID II ▴ Best execution.” Dechert, 2014.
Planet Compliance. “In a nutshell ▴ Best Execution under MiFID II/MiFIR.” Planet Compliance, 2018.
Global Relay. “MiFID II and MiFIR ▴ Key differences and similarities.” Global Relay, 2024.
“Best Execution Under MiFID II.” Datasite, 2017.
Hogan Lovells. “Achieving best execution under MiFID II.” Hogan Lovells, 2017.

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A System of Continuous Optimization

The evolution from MiFID I to MiFID II reframed the concept of best execution from a procedural obligation into a dynamic system of continuous improvement. The regulations compel a financial institution to look inward, to dissect its own decision-making processes, and to justify its execution choices with empirical evidence. The framework moves beyond a simple checklist of duties and demands the cultivation of an internal culture of accountability, where execution quality is not an afterthought but a central pillar of the client service proposition.

Considering this regulatory architecture, firms are prompted to evaluate the robustness of their own operational frameworks. Is the data capture mechanism comprehensive enough to feed the analytical models required? Are the analytical tools sophisticated enough to derive meaningful insights from the terabytes of market data now available?

Ultimately, the regulations suggest that achieving a superior execution edge is inseparable from possessing a superior operational and analytical infrastructure. The mandate is clear ▴ the process of seeking the best outcome for a client must itself be subject to a process of perpetual optimization.