What Are the Key Differences in Applying Rts 28 Principles to Rfq versus Lit Markets? ▴ Question

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Concept

The application of Regulatory Technical Standard 28 (RTS 28) principles presents a fundamental divergence when applied to Request for Quote (RFQ) and lit markets. This divergence stems from the inherent structural opposition of these two liquidity sources. Lit markets, characterized by their central limit order books (CLOB), offer a continuous stream of public, pre-trade transparent data.

Conversely, RFQ systems operate as private, point-in-time negotiations, revealing information only to the solicited participants. The core challenge of RTS 28 is to create a standardized framework for best execution reporting that can meaningfully compare performance across these disparate environments.

From a systems perspective, lit markets are akin to an open, public utility, where price and liquidity data are broadcast widely. This transparency simplifies certain aspects of RTS 28 reporting, as a clear, time-stamped record of the available market price is readily accessible. The bilateral nature of RFQ markets, however, functions more like a series of private, encrypted communication channels.

Here, the concept of a single “market price” at the moment of execution is less defined, replaced by a competitive spread of quotes from selected liquidity providers. This structural difference necessitates a more nuanced approach to demonstrating best execution, moving beyond simple price comparison to a qualitative assessment of the quoting process itself.

RTS 28 forces a unified reporting standard onto market structures with fundamentally different data signatures, demanding a sophisticated approach to prove best execution.

The mandate of RTS 28 is to ensure that investment firms take all sufficient steps to obtain the best possible result for their clients. The execution factors to be considered are price, costs, speed, likelihood of execution and settlement, size, nature, or any other consideration relevant to the execution of the order. While these factors are universal, their application and evidence collection differ dramatically between lit and RFQ protocols.

In a lit market, the public data stream provides a clear benchmark for these factors. For an RFQ, the firm must internally construct its own benchmark based on the responses received, creating a different set of data points and analytical challenges for compliance.

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Strategy

A firm’s strategy for RTS 28 compliance must be bifurcated, with distinct methodologies for lit and RFQ market interactions. For lit markets, the strategy is one of comprehensive data capture and comparative analytics. For RFQ markets, the strategy shifts to a focus on process integrity and qualitative justification. The overarching goal is to construct a cohesive best execution narrative that is defensible to regulators, even when the underlying data sources are fundamentally dissimilar.

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Data Strategy for Lit Markets

In the context of lit markets, the strategic imperative is to systematically record and analyze the publicly available order book data at the time of execution. This involves capturing not just the executed price but also the depth of the book, the displayed liquidity at various price levels, and the speed of execution. The resulting dataset allows for a quantitative, evidence-based comparison against the chosen execution venue. A firm’s execution management system (EMS) and order management system (OMS) must be architected to log these data points for every single order.

Benchmarking ▴ The primary strategy is to benchmark every lit market execution against the European Best Bid and Offer (EBBO) or other relevant consolidated tape metrics. This provides a clear, quantitative measure of price improvement or slippage.
TCA Integration ▴ Transaction Cost Analysis (TCA) is a cornerstone of the lit market strategy. Post-trade TCA reports should analyze execution performance against various benchmarks, such as Volume-Weighted Average Price (VWAP) and Arrival Price, to provide a multi-faceted view of execution quality.
Venue Analysis ▴ The strategy must include a periodic, data-driven review of all lit venues used. This analysis should compare venues based on metrics like fill rates, price improvement statistics, and instances of latency-driven slippage, allowing the firm to optimize its routing logic.

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Process Integrity for RFQ Markets

For RFQ markets, where pre-trade data is private, the strategic focus shifts from external benchmarking to internal process validation. The firm must demonstrate that its process for soliciting quotes is fair, competitive, and designed to achieve the best outcome. The strategy is less about proving the executed price was the absolute best available in the entire market and more about proving it was the best available within a robust and well-documented competitive process.

For RFQ venues, demonstrating best execution is a matter of proving the integrity of the selection process, not just the quality of the final price.

The core of the RFQ strategy is the creation of an auditable trail for each request. This trail must document which liquidity providers were solicited, their response times, the quotes they provided, and a clear justification for why the winning quote was selected. This qualitative information becomes a central part of the RTS 28 report.

The following table illustrates the strategic differences in data collection and analysis for RTS 28 compliance:

Factor	Lit Market Strategy	RFQ Market Strategy
Price	Quantitative comparison to public benchmark (e.g. EBBO).	Qualitative and quantitative comparison of quotes received from a competitive panel.
Costs	Analysis of explicit costs (fees, commissions) and implicit costs (slippage).	Analysis of the all-in price quoted, which typically includes the liquidity provider’s spread and costs.
Speed of Execution	Measured in milliseconds from order routing to confirmation.	Measured by the time taken to complete the RFQ process and the responsiveness of liquidity providers.
Likelihood of Execution	Analysis of fill rates and order completion statistics on the venue.	Assessment of the reliability of liquidity providers to provide competitive quotes for the desired size.

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Execution

The operational execution of RTS 28 reporting requires a sophisticated data infrastructure capable of handling the distinct data types from both lit and RFQ sources. The execution framework must be designed not only for compliance but also to generate actionable insights that feed back into the firm’s execution policy and venue selection process. This is where the theoretical principles of best execution are translated into concrete operational workflows.

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System Architecture for Data Capture

A firm’s technology stack is the foundation of its RTS 28 execution capability. The Order Management System (OMS) and Execution Management System (EMS) must be configured to act as the primary data capture and logging mechanisms. For lit market orders, the EMS must be connected to a low-latency market data feed to timestamp and record the state of the order book at the moment of execution. For RFQ orders, the EMS must be able to parse and store the structured data from RFQ platforms, including the identities of the liquidity providers, the full set of quotes, and the timestamps for each stage of the negotiation.

The following table details the specific data fields that must be captured and stored for effective RTS 28 reporting, highlighting the differences between the two market types:

Data Field	Lit Market Capture	RFQ Market Capture
Venue Identifier	MIC code of the exchange or MTF.	MIC code of the SI or OTF facilitating the RFQ.
Instrument Identifier	ISIN code.	ISIN code.
Execution Timestamp	Nanosecond-level timestamp of trade confirmation.	Timestamp of final trade agreement.
Pre-Trade Benchmark	Snapshot of the EBBO at the time of order routing.	Full record of all quotes received in response to the RFQ.
Post-Trade Price	The executed price.	The final agreed-upon price.
Rejection/Counterparty Data	Data on order rejections or routing failures.	Record of which LPs declined to quote and the reasons, if available.
Qualitative Justification	Typically not required if execution is at or better than the benchmark.	Mandatory field to justify the choice of counterparty, especially if not the best price.

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The Best Execution Committee Workflow

The operational workflow for RTS 28 culminates in the periodic review by the firm’s Best Execution Committee. This committee is responsible for analyzing the captured data and assessing the effectiveness of the firm’s execution arrangements. The process must be rigorous and documented.

Data Aggregation ▴ The first step is to aggregate the execution data from all sources into a centralized database. This data must be normalized to allow for meaningful comparison.
Quantitative Analysis (Lit Markets) ▴ The committee reviews TCA reports for lit market flow, identifying trends in execution quality by venue, time of day, and order type. They will look for systematic underperformance in any venue and recommend changes to the smart order router’s logic.
Qualitative Analysis (RFQ Markets) ▴ For RFQ flow, the committee reviews the process integrity. They will analyze the competitiveness of quote panels, the frequency with which different liquidity providers win, and the justifications provided for selecting counterparties. They will look for signs of concentration risk or a lack of competitive tension.
Report Generation ▴ The committee oversees the generation of the public RTS 28 report, ensuring that it accurately reflects the firm’s execution practices and includes the required qualitative summaries of the analysis performed.
Policy Feedback Loop ▴ The most critical step is to use the findings of the review to update the firm’s Best Execution Policy. This could involve adding or removing venues, changing the composition of RFQ panels, or adjusting algorithmic trading strategies.

Effective RTS 28 execution is a continuous cycle of data capture, rigorous analysis, and policy refinement, turning a compliance burden into a source of competitive advantage.

Ultimately, the successful execution of RTS 28 principles across both lit and RFQ markets depends on a firm’s ability to build a unified analytical framework. This framework must be flexible enough to accommodate the structural differences of each market type while being rigid enough to provide a consistent and defensible measure of execution quality. It is a challenge of data engineering, process design, and analytical rigor.

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References

European Securities and Markets Authority. (2017). Commission Delegated Regulation (EU) 2017/576 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the annual publication by investment firms of information on the identity of execution venues and on the quality of execution. Official Journal of the European Union.
Financial Conduct Authority. (2021). Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018. London, UK ▴ FCA.
O’Hara, M. (1995). Market Microstructure Theory. Blackwell Publishers.
Harris, L. (2003). Trading and Exchanges ▴ Market Microstructure for Practitioners. Oxford University Press.
European Securities and Markets Authority. (2024). Public Statement on the deprioritisation of supervisory actions on the obligation to publish RTS 28 reports. ESMA35-335435667-5871.
Parlour, C. A. & Seppi, D. J. (2008). Limit Order Markets ▴ A Survey. In Handbook of Financial Intermediation and Banking. Elsevier.
Madhavan, A. (2000). Market microstructure ▴ A survey. Journal of Financial Markets, 3 (3), 205-258.

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Reflection

The dual challenge of applying RTS 28 across lit and RFQ markets compels a deeper examination of a firm’s internal operational architecture. The regulation, while focused on external reporting, functions as an internal audit of a firm’s entire execution apparatus. It forces a systematic evaluation of not just where orders are sent, but why they are sent there and how performance is measured. The process of satisfying these requirements reveals the sophistication, or lack thereof, of a firm’s data infrastructure, its analytical capabilities, and the robustness of its decision-making frameworks.

Viewing RTS 28 as a compliance task is a limited perspective. Instead, it should be seen as a blueprint for building a superior execution intelligence system. The data collected for reporting can be repurposed to refine algorithmic strategies, optimize liquidity provider relationships, and ultimately, deliver measurably better outcomes for clients.

The principles embedded within the regulation provide a framework for continuous improvement, pushing firms to move beyond static policies to a dynamic, data-driven approach to market interaction. The ultimate question is not whether a firm can produce the report, but whether it can harness the underlying process to forge a durable competitive edge.