The Changing Impact Of Best Execution Requirements

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A roundtable write-up by Rupert Walker, GlobalTrading

Collaboration is essential to meet the regulatory challenges affecting the trading process and to ensure technology integration is effective and beneficial.

The move towards connecting and amalgamating systems and functions along the trading process and across asset classes seems irresistible. Regulatory requirements, cost pressures, broader investment mandates and operational logistics are driving the integration of technologies both within and between brokerages and buy-side clients.

The objective is to achieve seamless and efficient trade order management, execution and settlement that minimises expenses for clients and reduces errors throughout the chain. However, the implementation of measures to attain this ideal outcome reveals new problems, raises questions about what is attainable and casts doubts on the linear nature of this apparently ineluctable trend.

In a fast-moving, but often confusing landscape, collaboration among all participants, including buy- and sell-side front and back offices, compliance and legal departments, regulators and vendors is essential. Although the industry is driven by competition, cooperation is needed to meet the challenges posed by expectations as well as the application of the technologies themselves, agreed panellists at GlobalTrading roundtable discussion hosted by Singapore Exchange (SGX) and sponsored by BNP Paribas Securities Services on 16 November 2016.

The changes underway cannot be underestimated. Integration is taking place horizontally across asset classes, which involves adapting to single sources of data yet multi-asset portfolio strategies; and vertically, making front offices more reliant on additional alpha-generation from back office information and efficiencies.

The catalysts are the globalisation of fund management, regulators’ insistence on best execution and transaction transparency, and higher buy-side expectations as it gains access to the types of technology that was previously supplied by brokerages.

Meanwhile, third-party service and product providers need to be more flexible. They can no longer assume clients will make an exclusive purchase across the whole order, execution and post-trade management system; instead they are more likely to mix-and-match from different vendors. Aggregation of systems might make sense if a buy-side client has full connectivity, but less so if its systems are already dispersed among several vendors.

Most especially, regulatory impositions, such as MiFID II, are transforming the working environment. Their all-encompassing nature leaves few departments within a buy- or sell-side firm untouched, so more internal stakeholders are involved in decision making processes, from strategy to implementation to monitoring.

Staff must also be flexible and learn new skill-sets to cope with an overload of information, to comply with new rules and understand the implications of the complex technologies that are being introduced. This creates pressures on time, distracting staff from their areas of expertise and increasing the potential for errors. One response is for both buy- and sell-side to be more ruthless: reducing their number of vendors and counterparties. Meanwhile, firms are tending to develop human capital internally rather than buy expertise from outside.

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