Best Execution and Global Trading

In the last of my blog entries on capital markets regulations and restructuring, I thought it worth mopping up best execution and global trading platforms, as these were referenced in the first item as a key part of future market change.

Oh, and if you missed them, here are the previous blog entries:

• Part One: SEC to crackdown on HFT?
• Part Two: What was the cause of the 'flash crash'
• Part Three: Exactly what is and how big are 'dark pools'?
• Part Four: MiFID II - the post-trade agenda

In the case of best execution and global platforms, we have two final pieces of the mix that will shape tomorrow’s trading.

Best execution was a hotly debated pre-MiFID discussion, with many arguments over what it meant.

It finally seemed to settle on something along the lines of: brokers and dealers are obliged to obtain the best possible result of a trade for a client, taking into account not just price but costs, speed, likelihood of execution and settlement, size and other considerations.

The problem is that this definition was too fuzzy and has never really been tested by a regulator.

For example, Google “best execution” and you get a whole range of garbled returns. Google “MiFID fine best execution” and you don’t even find anyone who has been fined for failing to provide best execution.

So much for that.

Mind you, there have been fines related to best execution. For example, the FSA has fined Instinet, Credit Suisse, Barclays, Commerzbank and more for failures in reporting on trades, most of which are related to date time stamp reporting.

This is due to orders through smart order routers getting different timings as they go through different servers, such that the sequence of trade execution is misreported; a practice the FSA is clearly not going to tolerate as it opens the market to further potential abuse if timings are inaccurate. Just look at what happens with low latency, and you’ll see why this is important.

So best execution is still under the microscope, but it appears that the regulators have done far better working out the theory of best execution than the practice of it.

Meanwhile, the idea of a global trading platform is getting closer, as Chi-X moves to Asia and BATS is over here. So here’s a vision of tomorrow: you can post trades to any venue anywhere in real-time and get collateral management and clearing handled by the trade venues, such that you have no post-trade headaches.

How?

Well, this relates to something that was mentioned to me about trade venues looking at the global markets and targeting clearing and settlement hubs such as EuroCCP/DTCC to enable global management of collateral. What then happens is that the posting of settlement is also automated.

I can’t quite see that happening today, although the concept is one where regional clearing and settlement hubs emerge that support regional trade execution venues, all linked via low latency technologies to enable global trading.

Yowser ... that’s a hard concept to swallow but, if it happened, how the hell would regulators manage these markets?

As I mention these trends btw, Jeremy Grant who focuses upon trading trends for the Financial Times is attending the MiFID conference in Brussels today. Some interesting tweets already:

Sharon Bowles (MEP)

On HFT: “Who is thinking what they are doing any more?”
On Best Execution: “It needs more supervision, great consistency and better implementation”
On MiFID: “We must be careful not to reverse engineer MiFID and come up with the wrong objectives”

Michel Barnier, DG of Internal Markets

“We will take a very, very close look at high-frequency trading.”
“Technological complexity or technological developments cannot be used as an excuse to derogate from the fundamental principles of transparency, responsibility and appropriate regulation.”

This is Part Five in a Series of Posts on the Regulatory Agenda for Capital Markets:

• Part One: SEC to crackdown on HFT?
• Part Two: What was the cause of the 'flash crash'
• Part Three: Exactly what is and how big are 'dark pools'?
• Part Four: MiFID II - the post-trade agenda
• Part Five: Best Execution and Global Trading

These items also build upon a series of posts about the Deutsche Börse:

• If you can't afford the tech, get out of the market
• Circuit
  breakers on the Deutsche Börse
• Forget
  Frankfurt, I'm moving to Basildon