Bad Data is Stopping Correct Best Ex Analysis
The buy-side is growing increasingly frustrated with low-quality, non-uniform data provided by the sell-side. With RTS 27 and RTS 28 in effect, this poor data is making it harder for the buy-side to comply with MiFID’s best execution reporting regulations.
MiFID II Best Execution: RTS 27 and RTS 28 Explained
When MiFID II was rolled out at the start of 2018, best execution was at the forefront of discussion. It aimed to help protect investors and ensure that they ESMA’s regulatory approach to best execution was outlined mainly in a pair of Regulatory Technical Standards: RTS 27 and RTS 28.
RTS 28 MiFID II states that all entities on the buy-side must submit annual reports of their top five counterparties. Beyond this, they must also produce two distinct reports highlighting which trades were executed directly on venues, and those executed by way of a broker.
RTS 27, conversely, states that execution venues, market makers and systematic internalizers must publish quarterly execution reports.
These requirements, when implemented correctly, ensure that best execution is achieved by enforcing market transparency. However, many parties on the sell-side are complaining about the quality of data being provided by buy-side entities. Herein lies the issue.
Poor Quality Data
In order for buy-side entities to compile comprehensive and accurate reports in accordance with MiFID II, they must receive accurate and uniform data from sell-side entities. This is a necessity if RTS 27 and RTS 28 are to have their desired effect.
However, there is an increasing number of reports that buy-side entities are dissatisfied with the quality of data being supplied (see this article by Markets Media). Many sell-side entities cite a lack of uniformity and standardization in the data provided by the buy-side. This consequently means that the sell-side is incapable of delivering MiFID-compliant reports. This serves to undermine RTS 27 and RTS 28, as well as the market transparency they encourage.
One key issue which is prohibiting successful MiFID reporting is the combination of reports. RTS 28 and Article 65.6 of MiFID II state that the top five venues and top five brokers must be stated in separate, individual reports. However, many buy-side entities are combining the two into a single report, making futile the sell-side’s attempts to generate MiFID-compliant reports.
The Future of MiFID Best Execution Reporting
In today’s global market, all MiFID regulations – not just those related to best execution – are beginning to be adopted by international firms, as discussed here and here. In the United States, for instance, the SEC has been gradually aligning itself more closely with the legislative framework outlined in MiFID II,
However, if the rest of the world is to successfully adopt a MiFID-adjacent approach to best execution analysis, these inconsistencies in reporting must be addressed by sell-side entities. If the globalisation of these regulations is to occur, a more standardized approach must be taken.