Fund managers are frustrated with the lack of uniformity and standardization of data from the sell side which they need to fulfil their reporting requirements for best execution due to MiFID II.

Under MiFID II, the regulations which went live in the European Union at the start of last year, the buy side needs to annually publish their top five counterparties and produce two reports separating trades executed directly on venues (RTS 28) from those transmitted to a broker (Article 65.6).

Charlotte Decuyper, EMEA market structure and strategy at Liquidnet, told Markets Media that the institutional investor block trading network has been discussing the value of the RTS 28 and Article 65.6 reports with asset managers.

She said: “There has been an improvement in terms of transparency between 2018 and 2017 but it is still a work in progress.”

Liquidnet reviewed the 2017 and 2018 best execution  RTS 28 and Article 65.6 disclosures for equities from 70 asset managers for a study, What’s Next For Best Ex.

“There is frustration with regards to the data being provided by the sell side to the buy side under RTS 27 and the lack of uniformity and standardization,” added Decuyper. “The quality of data needs to be improved and it is increasingly difficult to have different obligations under MiFID II and UCITS.”

UCITS funds are excluded from the best execution reporting requirements, so some managers are only reporting a fraction of their flow.

She also highlighted other issues which hamper transparency for end investors. For example, some asset managers have trading desks in other jurisdictions which they include in the reports providing little transparency about the broker on the other end of the trade.

“RTS 28 and Article 65.6 are used separately to report the top five  venues and  the top five brokers respectively,” added Decuyper. “However, around 30% of the buyside is producing only one combined report making it challenging for end investors to understand the quality of execution achieved.”

Changing liquidity providers

The study said that US and EU bulge bracket banks respectively represented 44% and 23% of brokers reported under Article 65.6 in 2017. Last year their share fell to 35% and 20% respectively as MiFID II requires the unbundling of research payments from trading commissions.

“Big global banks used to be in every top five and while this still holds true for some buy-side firms, tier two banks and boutique/niche brokers are emerging as the strong winners of this change,” added Liquidnet. “In 2017, other liquidity providers used to represent 15% of the market, in 12 months, that market share has increased to 26%.”

Decuyper expects the diversification of broker lists to persist as trading desks adjust to MiFID II and unbundling. She  said “The global push towards greater transparency will continue and from a commercial perspective, transparency will drive future competition in the industry.”

Systematic internalisers

Systematic internalisers operated by US bulge bracket banks have a 42% market share of venues used by the buy side based on 2018 data according to the study. European bulge brackets represent 21% of the market. MiFID II banned broker crossing networks and required broker-dealers to set up systematic internalisers in order to provide principal liquidity to clients.

However the presence of some electronic liquidity providers in the top five venue lists shows that some asset managers like to trade directly on these venues without using an intermediary. Liquidnet said this could due to the potential conflicts of interest emerging from bank SIs.

“Asset managers need to ensure that an order sent to a broker operating an SI will be executed with the objective of obtaining the best outcome for its clients, whether it is on that SI or routed to another venue,” said Liquidnet. “As the prioritization and routing logic of an SI is often opaque, asset managers may favour the greater transparency associated with ELP SIs.”

Tim Cave, analyst at consultancy Tabb Group, said in a report that there was a significant increase in activity on SIs in April, particularly above the large-in-scale thresholds. Addressable daily notional SI volumes totalled €9.6bn in April, compared with €7.7bn in March according to Tabb.

Consultancy Greenwich Associates added in a report that SIs are now capturing about 14% of all buy-side flow and have proved a popular venue for institutional investors to access liquidity. The survey said almost 90% of buy-side traders are connected to at least one SI, with Bank of America Merrill Lynch, JP Morgan and Goldman Sachs having the highest penetration.

Richard Johnson, principal in the market structure and technology practice at Greenwich Associates, said in the report that the popularity of SIs in Europe is likely to proliferate. “Now that they have demonstrated their ability to satisfy buy-side demands for liquidity and offer a way for brokers to differentiate themselves, we may see them spread to other markets,” he added.

Liquidnet said the increased level of regulatory scrutiny on best execution looks set to continue with the UK Financial Conduct Authority’s announcement that asset managers will now have to make an annual assessment of value as part of their obligation to act in the best interest of their clients.

In addition, MiFID II best execution requirements are spreading globally as asset managers are facing increasing demands to demonstrate best execution through quantitative and qualitative evidence to win new mandates and retain existing ones.

“The biggest change in best execution under MiFID II has been for asset managers to collect data to evidence their execution decisions to their clients,’ said Decuyper. “There are discussions about moving from TCA, which continues to frustrate, towards best execution analysis which would incorporates pre-trade, at-trade and post-trade data.”