Despite coming into force officially more than four months ago on 3rd January, the European Union's second Markets in Financial Instruments Directive still has some new rules in store for us over the course of 2018.

Firms have a long way to go until they can truly claim to comply this key new regulation has been satisfied and attention is now turning to MiFID II’s 'best execution' requirements that are now coming into force under RTS (regulatory technical standards - an EU term) 27 and 28. With regulators arguing that execution quality is fundamental to the integrity of the market, one of the major effects of MiFID II will be to impose new and comprehensive best-execution standards which require firms to embark on substantive trade reviews.

On April 30, firms were required to publish their first reports publicly under RTS28, or at least make their ‘best endeavours’ (whatever that might mean) to do so, this year. RTS28 is designed to protect investors from skulduggery and their own inexperience by forcing firms to give them more information about the ways in which they are carrying out their orders on trading venues, including systematic internalisers, market makers or other providers of liquidity. The new rules deal with the content and format of information that investment firms ought to publish and require each firm to make an annual disclosure that contains details of its order-routing practices for clients in relation to all asset classes.

Now, under RTS28, firms’ best-execution obligations include the extraction of relevant trade data, the categorisation of customers and trading activity, the correct formatting of data in human- and machine-readable formats, the addition of analytical statements and the rendering of all this information publicly available.

Small firms with uncomplicated trading mechanisms are finding it fairly simple to complying with RTS28 because they are allowed to limit their disclosures to five trading venues. As a firm’s activity increases in complexity, however, its obligations to report things increase as well. Larger firms might find it very burdensome to manage RTS28’s data component in future, as their compliance departments might find themselves spending more and more time classifying trades, making data 'normal,' formatting reports and doing administrative jobs.

RTS27, which deals with the content, format and periodicity of data to do with execution quality, is to follow RTS28 on 30 June. RTS27 outlines reporting requirements for trading venues, including systematic internalisers, market makers and other providers of liquidity, obliging them to prove to the public that they have taken ‘all sufficient steps’ to obtain the best possible result for customers when executing orders. The point of this is to help investment firms identify the most competitive trading venues on which to trade.  

These ‘sufficient steps’ must be made evident in the form of a quarterly best execution report, made available free of charge and downloadable in machine-readable format. Any company that makes markets in all reportable asset classes and periodically publishes data about the quality of the execution will be required to comply with RTS27. The act of publishing these reports requires a large amount of data pertaining to price, costs and the speed and likelihood of execution for this-or-that financial instrument.  

Firms’ best-execution obligations under MiFID II are undoubtedly comprehensive and can be expensive if they not obey them correctly. Although these obligations are bound to make compliance more burdensome, the new data and the more sophisticated best-execution processes that they generate could help firms that take them seriously to compete with firms that do not. The use of technology can help the firm because innovative new data feeds and bits of performance-measurement software are always likely to lead to more sophisticated, quantitative best-execution processes and a better analysis of data.

Agile 'Big Data' software can help a firm process, store and analyse the vast quantities of data it requires for best-execution reporting because it reduces (and even might eliminate) the problems that the firm has when collecting and processing the data manually. This then frees up compliance teams to put the new insights they have gained into practice. Firms should be aware, however, that the IT they need will vary widely according to the size and complexity of their operations.

Firms should be encouraged to embrace their new best-execution obligations and analyse transactions in more depth than before, the better to compare clients' own trade data with an extensive database of market information and to analyse trades at an aggregated level to discern important trends in their trading activity. MiFID II is an unparalleled opportunity for them to handle data in new ways, dream up new regulatory processes and use the trade data that they gather to serve their customers better.

* Matt Smith is the CEO of SteelEye, a compliance tech and data analysis firm whose software reports on transactions and keeps records. Visit https://www.steel-eye.com