Best Execution: Essential for Asset Managers and Hedge Funds Looking to Comply and Improve Performance

Yield and performance. The heart of every asset manager’s business. The driving force behind the day-to-day activity of buy-side firms. Yet, how many of these firms view complying with the best execution as an integral part of optimizing their yield and performance numbers? If I had to hazard a guess, I would say few. In fact, many would be asking themselves what Best Execution has to do with improved performance? Or perhaps thinking that it’s just another annoying regulation that’s a resource drainer rather than a performance enhancer.

But it’s not. Best execution can help improve operational efficiency and have a direct impact on performance numbers. Before we examine how to use best execution for the betterment of your business, let’s look at some of the basic requirements of the best execution as outlined by the regulator.

What do the regulators have to say about best execution?

The law by ESMA: Introduced in 2007, MiFID I Article 21 – Investment firms (IFs) required to take all reasonable steps to obtain, when executing orders, the best possible result for their clients. With the introduction of MiFID II, the bar has gone higher from “reasonable steps” to “all sufficient steps ”.

The FCA added in TR 13 /14 on top of the above: “Delivering best execution is fundamental to market integrity and to the delivery of good outcomes for clients who rely on agents to act in their best interests”

What are the consequences of not performing best execution?

As with all regulation, non-compliance brings with it the risk of being penalized. In 2017, the FCA reviewed if the issues from their previous Thematic Review were implemented and declared that “Our next steps…if we find that firms are still not fulfilling their best execution obligations, we will consider appropriate action, including more detailed investigations into specific firms, individuals or practices.” On a more practical note there have already been examples of asset managers being fined for not complying with best execution, including the FCA imposing a fine on Threadneedle Asset Management who traded fixed income out of the market price.

What assets fall under best execution?

It’s worth noting that best execution is not limited to the MiFID II instruments that require transaction reporting, but rather applies across other asset classes too. A good example is FX derivatives trades that do not fall under the scope of MiFID II transaction reporting but requires best execution monitoring.

OTC products also fall under best execution and the regulator requires firms “to check the fairness of the price proposed to the client when executing orders or taking decisions to deal in OTC products, including bespoke products, by gathering market data used in the estimation of the price of such products and, where possible, by comparing with similar or comparable products.”

The bottom line: Using Best Execution to improve performance, operations and yield

Best execution is not only a regulatory issue but even more importantly, a fund performance issue that can directly impact your bottom line financial results. We have seen our clients who use our Best Execution platform reap the tangible benefits that go above and beyond complying with the regulation and avoiding hefty fines. Below are three examples, how our clients have used our best execution platform to improve their businesses:

Enhanced performance using best execution: The regulator requires firms to use external market data sources to benchmark their performance, as can be seen here . However, some managers are using their own feed for benchmarking which is an incorrect practice. For example, asset managers who do not benchmark their brokers against market prices and against each other can lose valuable performance basis points. They also lack the insights needed to demand that their brokers improve their execution policies and to make the decision to switch brokers if needs be.

Improved operational efficiency using best execution: instead of manually checking prices, it’s best-practice to implement a systematic way to do it. A solution that can offer asset managers a way to benchmark their execution vs market prices saves the asset manager from having to buy external data feed for this purpose.

Better execution strategies using best execution: the purpose of evaluating your execution strategy is not only improving internal metrics but aiming to get the best possible outcome for clients. This could mean having to make incremental changes to your execution strategy which could include using different execution venues, liquidity pools and execution times along the day to achieve this desired outcome.

Especially for our clients who are already reporting with us, the use of our Best Execution dashboard has been a win-win for them. Because we already have all of the trade information at hand in our systems, there was little to no effort in terms of setup for them. Even with new clients, onboarding is simple while the benefits are tremendous.

Contact us to learn more about how Cappitech can help you monitor your Best Execution to gain a competitive edge.




Trudy Namer
About the author: Trudy Namer
As Executive Director, Marketing at S&P Global Market Intelligence Cappitech, Trudy leads the global marketing strategy for Cappitech. Capitalizing on over 15 years of B2B and financial services marketing experience, Trudy specializes in all aspects of marketing including branding, lead generation, digital marketing, public relations, thought leadership positioning and content creation. Trudy holds a Business of Commerce degree (Cum Laude) from the University of South Africa and a Master of Business Administration (MBA) from Bar Ilan University, Israel.