Why Was the Best Execution Reporting under RTS 27 and RTS 28 Deemed Ineffective?

Concept

The operational premise behind the Regulatory Technical Standards (RTS) 27 and 28 was to architect a transparent marketplace. The objective was to provide end investors with a clear, data-driven mechanism to evaluate how investment firms and execution venues were delivering on their best execution obligations. You, as a market participant, were meant to receive a standardized quarterly report (RTS 27) from venues detailing execution quality and an annual report (RTS 28) from your investment firms summarizing where they routed your orders. This entire framework was built on the assumption that with mandated data, superior execution would become a quantifiable and comparable commodity, driving competition and empowering clients.

The system, however, failed to account for the operational realities of a fragmented and technologically diverse market. Its core logic buckled under the weight of its own complexity and the absence of rigidly defined data standards, leading to its eventual deprecation by regulators.

The reporting framework’s failure stemmed from a disconnect between its theoretical transparency goals and the practical realities of data implementation in financial markets.

What Was the Intended Function of the Reporting System?

The dual-report system was designed as a feedback loop. RTS 27 reports from execution venues like stock exchanges, multilateral trading facilities (MTFs), and systematic internalisers were to provide granular data on price, costs, speed, and likelihood of execution for individual financial instruments. This was the raw material. Investment firms were then expected to ingest this data, combine it with their own internal execution data, and produce an annual RTS 28 report.

This latter report was the client-facing output, designed to show which venues the firm used for different classes of instruments and to provide a qualitative assessment of how execution quality was achieved. The theory was that an investor could compare the RTS 28 reports from two different brokers and make an informed decision. This direct line from raw venue data to client-facing summary was the system’s central pillar.

A Systemic Mismatch in Data Architecture

The fundamental flaw was not in the intent but in the technical specification. The mandate for reports to be in a “machine-readable” format was a critical point of failure. This term, lacking a single, prescriptive definition, was interpreted by firms and venues in a multitude of ways. One venue might publish a CSV file, another a PDF, and a third an Excel spreadsheet with a proprietary layout.

This lack of a unified data schema made aggregation and comparison an exercise in data engineering, a task far beyond the capabilities or desires of the average investor. For the system to have functioned as designed, a universal, rigidly enforced data language ▴ akin to the FIX protocol for order routing ▴ would have been required from the outset. Without it, the data remained siloed in incompatible formats, rendering the intended transparency an illusion.

Strategy

The strategic failure of RTS 27 and 28 reporting can be analyzed as a systemic breakdown across three distinct domains ▴ data utility, compliance incentives, and user engagement. The regulations created a strategic imperative to produce reports, yet the reports themselves offered no strategic value to their intended audience. This paradox created a compliance culture focused on fulfilling a mandate rather than delivering meaningful transparency. Market participants, from execution venues to investment firms, were forced to develop strategies to comply with the letter of the law, often at great expense, while the spirit of the regulation ▴ empowering investor choice ▴ was lost.

The Data Utility Paradox

The core strategic challenge was the immense difficulty in transforming the raw data from RTS 27 and 28 reports into actionable intelligence. The information provided was simultaneously too complex and too generic. For instance, an RTS 27 report would contain vast tables of execution data, but without sophisticated analytical tools, it was nearly impossible for an investor to draw a credible comparison between two venues. Concurrently, the RTS 28 reports, which aggregated a firm’s entire client flow, were too generalized.

A sophisticated institutional client executing large-volume trades in specific asset classes found little value in a report that averaged their specialized activity with that of retail clients trading entirely different instruments. The information was not tailored to the specific, high-value questions that drive institutional order routing decisions.

The reports failed because they provided data without context, creating a high-cost, low-value compliance exercise for firms.

Compliance Incentives and Misaligned Goals

The regulatory framework inadvertently incentivized a “check-the-box” approach to compliance. The primary goal for many firms became the production of a report that met the technical requirements, regardless of its usability. The resources required to collect, collate, and format the data were substantial, particularly for firms like CFD providers who were asked to report on data they did not naturally possess within their operational workflows.

This resource drain shifted the focus away from the qualitative aspects of best execution ▴ such as the strategic selection of venues based on liquidity conditions and market impact ▴ and toward the rote generation of data files. The system measured the ability to report, not the quality of execution itself.

Table of Reporting Inconsistencies

The strategic challenge of comparing data is evident when examining the variance in reporting practices. The lack of a single, mandated technical standard led to a proliferation of formats that hindered any attempt at automated analysis.

Why Did End Users Abandon the Reports?

The ultimate failure of the strategy was the verdict of the end users. Both retail and institutional investors overwhelmingly found the reports to be of little to no use. There is significant evidence that the reports were rarely, if ever, read by the clients they were intended to serve. Investment firms reported receiving no inquiries about the published data from their clients.

This lack of engagement was a rational response to the poor quality and usability of the information. Investors continued to rely on more established methods for evaluating brokers, such as direct conversations, proprietary transaction cost analysis (TCA), and the overall quality of the relationship. The reports, designed to be a primary tool for due diligence, became an irrelevant artifact of a well-intentioned but poorly executed regulatory idea.

Execution

The execution of the RTS 27 and 28 reporting mandate was flawed at the most fundamental level of operational design. The process imposed significant technical and analytical burdens on financial institutions without providing the necessary standards for data uniformity. This led to a situation where compliance became an exercise in reverse-engineering a solution to a poorly defined problem. The practical steps required to generate these reports were complex and incongruous with existing operational workflows, ultimately ensuring the final output would be of minimal value.

A Deep Dive into the RTS 27 Generation Process

For an execution venue, the creation of an RTS 27 report was a substantial quarterly undertaking. It required a firm to dissect its entire execution dataset and present it through a series of highly specific, yet inconsistently interpreted, lenses.

1. Data Capture ▴ The process began with capturing every single trade and order event for every financial instrument traded on the venue. This included timestamps, prices, quantities, and flags for different order types and execution conditions.
2. Data Classification ▴ Each trade had to be categorized according to the MiFID II instrument classification system. For each instrument, data had to be further segmented by factors like order size (e.g. small, medium, large) and order type (e.g. limit order, market order).
3. Metric Calculation ▴ The venue then had to calculate a range of prescribed metrics. This included average effective spread, average execution price, likelihood of execution, and various measures of latency. Calculating these metrics consistently across different asset classes and trading protocols was a major challenge.
4. Report Formatting ▴ The final step was to compile this data into the mandated “machine-readable” format. As discussed, the ambiguity of this requirement led to a wide variance in file types and structures, from CSVs to PDFs, which crippled any attempt at industry-wide aggregation.

The mandate required a level of data standardization that the regulation itself failed to provide, dooming the execution from the start.

The Flawed Logic of the RTS 28 Aggregation

The execution challenge for investment firms creating RTS 28 reports was one of aggregation and qualitative justification. The process was intended to provide a clear summary of a firm’s execution practices, but the underlying mechanics were unsound.

• Venue Identification ▴ Firms first had to identify the top five execution venues used for each class of financial instrument. This required mapping all client orders to the specific venues where they were executed.
• Data Aggregation ▴ The firm then had to summarize the total volume and number of orders executed at each of these top five venues. This aggregation across all clients is what rendered the report largely useless for institutional analysis, as it mixed diverse trading strategies and client types into a single, generic statistic.
• Qualitative Summary ▴ The most subjective part of the process was the requirement to produce a summary of the execution quality obtained. Firms had to explain their venue selection strategy and how it aligned with their best execution policy. This often resulted in boilerplate text that offered little genuine insight into the firm’s decision-making process.

Table of Intended versus Actual Outcomes

The chasm between the regulatory intent and the operational reality is the clearest indictment of the framework’s execution failure.

Reflection

The dismantling of the RTS 27 and 28 reporting regime serves as a powerful case study in the architecture of financial regulation. It demonstrates that mandating the disclosure of data is a hollow victory if the structure of that data is not rigorously defined and its utility for the end user is not placed at the center of the design. The failure was not a lack of data, but a failure of information design. As you refine your own firm’s execution and analysis framework, consider how you transform raw data into genuine intelligence.

How do you ensure that the metrics you monitor are not just artifacts of a process, but true indicators of performance that drive strategic decisions? The future of best execution lies in tailored, real-time analytics, a domain where regulatory mandates have proven to be a poor substitute for market-driven innovation.