With RTS 28 Being Deprioritized How Can Firms Still Benchmark Their Execution Quality?

Concept

The deprioritization of the Regulatory Technical Standard 28 (RTS 28) reporting obligation represents a fundamental recalibration in how the market architecture perceives and verifies execution quality. The operational reality for firms is that the core mandate for achieving best execution has not been diluted; it has been intensified. The removal of this specific reporting layer strips away a procedural safe harbor, compelling institutions to move beyond a compliance-oriented checklist and toward a more profound, evidence-based demonstration of their execution efficacy.

The system is now demanding a higher standard of proof, one rooted in verifiable performance data and a coherent internal governance structure. This shift elevates the practice of execution quality benchmarking from a periodic, standardized disclosure to a continuous, dynamic, and internally managed discipline.

The logic behind this regulatory evolution stems from a market-wide consensus that the RTS 28 reports themselves were flawed instruments. They were expensive to produce, difficult for end-investors to interpret, and ultimately failed to provide the clear, comparative metrics needed to genuinely assess execution outcomes. The reports often devolved into a static snapshot of the top five venues, a metric that could be easily misinterpreted and lacked the context of prevailing market conditions, order complexity, or the specific strategic intent behind the execution instructions.

The regulatory bodies, including the European Securities and Markets Authority (ESMA) and the UK’s Financial Conduct Authority (FCA), recognized that the cost of producing these reports was disproportionate to their utility. Consequently, supervisory focus has been officially deprioritized, first for RTS 27 and subsequently for RTS 28, clearing the path for a more robust and meaningful approach to emerge.

The foundational duty of best execution persists, compelling firms to adopt more sophisticated internal methods for performance validation.

This evolution places the onus squarely on the firm to construct and maintain its own comprehensive analytical framework. The absence of a mandated, public-facing report means that internal methodologies must be even more rigorous, as they become the primary mechanism for satisfying regulatory scrutiny, client demands, and internal risk management. The new paradigm is built upon a foundation of deep quantitative analysis, where every stage of the trade lifecycle is measured, benchmarked, and evaluated.

It requires a systemic integration of data from multiple sources ▴ Execution Management Systems (EMS), Order Management Systems (OMS), and Financial Information eXchange (FIX) protocol messages ▴ into a coherent analytical engine. The objective is to create an auditable, data-rich narrative that substantiates the firm’s execution strategy and demonstrates a systematic process for achieving the best possible result for its clients.

The Enduring Mandate of Best Execution

What is the real impact of removing a reporting requirement? It forces a transition from procedural compliance to substantive proof. The MiFID II framework’s core principle of taking all sufficient steps to obtain the best possible result for clients remains fully intact. This principle is not defined by the generation of a specific report but by the existence of a robust process.

Regulators expect firms to have a comprehensive order execution policy and a demonstrable system for monitoring its effectiveness. The deprioritization of RTS 28 simply removes one specific, and widely criticized, method of demonstrating compliance. It does not absolve the firm of its responsibility; it heightens it.

Firms must now be prepared to answer, with granular data, how they validate their choice of venues, brokers, and algorithms. They must be able to prove that their execution strategies are designed to optimize a range of factors, including price, costs, speed, likelihood of execution, and settlement size. This requires a move away from the high-level summary provided by RTS 28 and toward the granular world of Transaction Cost Analysis (TCA).

TCA becomes the central pillar of the new benchmarking regime, providing a multi-dimensional view of execution performance that is both quantitatively rigorous and contextually aware. It is the operational tool that transforms the abstract principle of best execution into a measurable and manageable business function.

Strategy

The strategic response to the obsolescence of RTS 28 involves a systemic pivot from periodic, compliance-driven reporting to a continuous, performance-oriented analytical framework. This framework is built upon the principles of Transaction Cost Analysis (TCA), a methodology that provides a structured and quantitative approach to measuring every facet of the trading process. Adopting a TCA-centric strategy allows a firm to internalize the function of execution quality benchmarking, transforming it from an external obligation into an internal source of competitive advantage. It is about building an operational system that not only satisfies regulatory expectations but also actively enhances trading performance and informs strategic decision-making.

This strategic shift requires a re-architecture of the firm’s approach to data. Where RTS 28 provided a high-level, retrospective summary, a TCA framework operates on a continuous feedback loop of granular, real-time, and historical data. The strategy is to embed analysis throughout the entire trade lifecycle, creating a system of checks and balances that begins before an order is even placed and continues long after it has been executed.

This lifecycle approach is composed of two primary components ▴ Pre-Trade Analysis and Post-Trade Analysis. Each component serves a distinct purpose, yet they are interconnected, forming a holistic system for managing and validating execution quality.

The Two Pillars of a Modern TCA Framework

A comprehensive execution quality strategy rests on two integrated analytical pillars. These pillars work in concert to provide a complete picture of performance, from initial decision to final settlement.

Pre-Trade Analysis the Predictive Engine

Pre-trade analysis is the forward-looking component of the TCA framework. Its purpose is to model the potential costs and risks of a planned trade before it is sent to the market. This analysis uses historical data and real-time market conditions to estimate key metrics like market impact, timing risk, and expected volatility. By evaluating these factors upfront, traders can make more informed decisions about how to structure and execute an order.

For instance, a pre-trade model might indicate that a large order in an illiquid security should be executed passively over a longer period to minimize market impact, whereas a smaller, more urgent order in a liquid instrument can be executed aggressively. This predictive capability is a critical tool for optimizing the execution strategy to the specific characteristics of the order and the prevailing market environment.

Post-Trade Analysis the Verification Engine

Post-trade analysis is the retrospective component, designed to measure what actually happened during the execution process. It involves comparing the executed trade against a variety of benchmarks to quantify its performance. This is the core of the verification process, providing the hard data needed to assess the effectiveness of the chosen strategy, broker, venue, and algorithm.

The insights generated from post-trade analysis are then fed back into the pre-trade models, creating a virtuous cycle of continuous improvement. This is where the firm builds its auditable record of performance, demonstrating a systematic approach to monitoring and enhancing execution outcomes.

A TCA-driven strategy transforms execution benchmarking from a regulatory burden into a source of actionable intelligence.

Core Benchmarks the Language of Performance

To implement a TCA framework, firms must adopt a set of standardized benchmarks to measure performance. These benchmarks provide a common language for evaluating execution costs and serve as the foundation for quantitative analysis. The selection of appropriate benchmarks is critical, as different metrics can tell different stories about a trade’s performance.

• Implementation Shortfall This is arguably the most comprehensive benchmark. It measures the total cost of execution from the moment the portfolio manager makes the investment decision to the point at which the order is fully executed. It captures not only the explicit costs (commissions, fees) and implicit costs (market impact, delay costs) but also the opportunity cost of any portion of the order that was not filled.
• Volume-Weighted Average Price (VWAP) This benchmark compares the average price of a firm’s execution against the average price of all trades in that security over a specific period, weighted by volume. It is a useful measure of how well a trade was executed relative to the overall market activity during that time. A price better than VWAP suggests a successful execution relative to the market’s momentum.
• Time-Weighted Average Price (TWAP) This benchmark compares the execution price to the average price of the security over the duration of the order. It is particularly useful for evaluating trades that are worked over a longer period, as it is less susceptible to large volume spikes than VWAP.
• Arrival Price This is a simple yet powerful benchmark that measures the performance of a trade against the market price at the moment the order arrived at the trading desk. The difference between the arrival price and the final execution price is known as slippage. It is a direct measure of the cost incurred during the execution process itself.

From Static Report to Dynamic System a Strategic Comparison

The strategic shift from RTS 28 to a TCA framework can be summarized by comparing their core attributes. This comparison highlights the profound difference in philosophy and operational capability between the two approaches.

Execution

The execution of a robust benchmarking framework in a post-RTS 28 world is a matter of system architecture and operational discipline. It requires the firm to build an internal infrastructure capable of capturing, processing, and analyzing vast amounts of trade data with precision and consistency. This is where the theoretical strategy translates into a tangible, operational reality.

The process involves integrating technology, establishing clear governance structures, and creating a culture of data-driven decision-making. The ultimate goal is to create a closed-loop system where performance is constantly measured, evaluated, and used to refine future execution strategies.

Building the Internal TCA Framework a Systems Approach

Constructing a durable TCA framework is a multi-stage process that involves the careful orchestration of data, technology, and human oversight. Each component is critical to the integrity and effectiveness of the overall system.

Data Acquisition the Foundation of Analysis

The entire TCA process is predicated on the quality and granularity of the underlying data. The system must be designed to capture a complete and accurate record of every event in an order’s lifecycle. This requires the integration of several key data sources:

• FIX Messages The Financial Information eXchange protocol is the lingua franca of electronic trading. FIX messages provide the most accurate and timestamped record of interactions between the firm and its brokers, including order creation, routing, and execution reports (fills). Capturing this data is non-negotiable for high-fidelity analysis.
• OMS/EMS Data The firm’s Order Management System and Execution Management System contain critical contextual information, such as the portfolio manager’s decision time, the arrival time of the order at the trading desk, and any specific instructions attached to the order. This data provides the “why” behind the trade.
• Market Data High-quality market data, including tick-by-tick trade and quote data, is essential for calculating benchmarks like VWAP and for accurately measuring market impact. A reliable source of historical and real-time market data is a foundational requirement.

The Governance Layer the Best Execution Committee

Technology alone is insufficient. A formal governance structure is necessary to interpret the results of the TCA and translate them into policy. This is the role of the Best Execution Committee.

This committee, typically composed of senior personnel from trading, compliance, risk, and portfolio management, is responsible for the regular review of execution quality. Its mandate includes:

1. Reviewing TCA Reports The committee systematically analyzes the quantitative data produced by the TCA system to identify trends, outliers, and areas of concern.
2. Providing Qualitative Overlay The committee discusses the context behind the numbers with traders and portfolio managers. A period of high market volatility, for example, might explain why certain trades experienced higher slippage.
3. Making Policy Adjustments Based on its findings, the committee has the authority to make documented changes to the firm’s order execution policy. This could involve changing the allocation of order flow to certain brokers, adjusting the parameters of trading algorithms, or adding or removing execution venues from the approved list.
4. Maintaining an Audit Trail The committee’s minutes and decisions form a critical part of the firm’s audit trail, providing regulators with clear evidence of a proactive and systematic approach to managing best execution.

Quantitative Analysis in Practice a Hypothetical TCA Report

How can firms systematically analyze execution quality? The core output of a TCA system is a detailed report that breaks down performance on a trade-by-trade basis. The following table provides a simplified example of such a report, illustrating the types of data points that are captured and analyzed.

Granular, fill-level data is the bedrock of any credible execution quality framework, transforming abstract obligations into measurable outcomes.

From Analysis to Actionable Intelligence

The data in the TCA report is the raw material. The final step in the execution process is to refine this data into actionable intelligence. By aggregating the results over time, the Best Execution Committee can generate higher-level summaries that reveal systemic patterns in performance. For example, a summary table could be created to evaluate broker performance across all trades within a given period.

This allows the firm to move beyond anecdotal evidence and make data-driven decisions about its most critical trading relationships. This systematic process of analysis, review, and adjustment is the definitive answer to how firms can and must benchmark their execution quality in the modern regulatory environment.

Reflection

The dissolution of the RTS 28 reporting mandate is an invitation to construct a superior internal system. It challenges firms to look beyond the mere act of compliance and to architect a framework of genuine operational intelligence. The data and processes discussed are components of a larger system, one that defines a firm’s capacity to navigate complex market structures with precision and purpose. The question now becomes a more profound one ▴ How will your institution leverage this new autonomy?

Will you build a system that merely satisfies the implicit regulatory requirements, or will you engineer a framework that generates a persistent, data-driven edge in execution performance? The potential lies not in the absence of a rule, but in the opportunity to define a more intelligent and effective one for yourselves.