In the Financial Times, Ben Jowett, Head of Business Development & Client Sales at Winterflood Securities discusses RTS 28 and how the regulation is improving the quality of firms' execution practices.

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MiFID has demolished the opaque world of research incentives

The results are in. The era in which research incentives drive trading order flow is categorically over. The aggregated data published in MiFID II mandated RTS 28 reports underlines a transformed asset and wealth management landscape that delivers a more transparent outcome for investors.

From January 2018, MiFID II required research to be priced separately from execution. This sweeping regulation was created to prompt a shift away from the industry practice of execution being supplied as part of a bundle of services, with no explicit charge, blurring the lines for investors. This resulted in an opaque situation where clients carried the burden of paying for often inefficiently used, or indeed unused, research. 

Best execution

Under MiFID II, investment firms who execute client orders are required to summarise and publish their top five execution venues in terms of trading volumes and values for each class of financial instrument (their RTS 28 report).

For equities, this information is required across 3 different liquidity bands, categorised based on the average daily number of trades for each equity instrument traded in the preceding year. Through these requirements, the regulator sought to provide greater transparency around execution and costs.

After much debate about this transformative ‘unbundling’ and attaining best execution, the results delivered good news for underlying investors (all firms were required to report by April 30th). By examining the RTS 28 results from five of the leading wealth mangers in the UK we can report that all of these wealth managers have directed the great majority of their flows to execution-only market makers, from which there is often significant price-improvement as well as a varied range of liquidity sources and venues.

In an environment where liquidity has arguably become the major issue, it is reassuring to investment firms to know that a competitive two-way price is available from market-makers who are willing to support the price-discovery process and provide stability.

As volatility returns to the market and macro fears loom, the depth of liquidity is more important than ever. A high-quality market-maker should have a comprehensive mix of liquidity from a diverse range of sources. Institutional business, corporate programmes (often via registrars), retail order-flow, platforms, hedge-funds, family offices, dark pools and other trading venues, in addition to the market-makers’ own capital commitment, combine to provide the depth of liquidity required for an effective market dynamic and hence good outcomes for its clients.

Improved outcomes

For consumers this is now a more transparent system with visibility around costs. And indeed, the regulation has recently prompted many investment firms to absorb the cost of research rather than pass it on – a further benefit to the end investor.

The successful reporting of RTS 28 data means that investors (and would-be investors) can now evaluate the quality of a firm’s execution practices by accessing key information about how and where the firm has executed client orders.

Regulation has delivered certainty over best execution and prompted asset managers to consider the transparency of their offerings. This has improved the oversight of investors and is driving industry best practice. Let’s hope that applying the spirit of MiFID II to improve underlying investor outcomes continues.

Ben Jowett, Head of Business Development & Client Sales at Winterflood Securities