'Best Execution' for Financial Trades: Network Costs, User Experience, and Other Factors

Posted by Mae Kowalke on Friday, September 09, 2016 with No comments

Financial services firms and the network operators that serve them are heavily focused on the impact of MiFID II regulations, now set to go into effect in Europe early in 2018, with ripple effects around the globe. MiFID II, noted WatersTechnology in a recent article on the topic, is largely about ‘best execution:’ getting financial trades completed in the best way for investors, while taking into account variables like venue, speed, and price. What factors impact execution in markets outside Europe and the U.S.Asia, for exampleand how does this relate to network performance and operating costs? Keep reading. 

In the U.S. and Europe, execution problems are mostly caused by the fragmentation of trading venues and the fact that more and more asset classes are now handled electronically, Waters Technology explained.

Most Asian financial marketplaces, however, function as single-exchange markets; investors have little or no choice of trading venue for a specific stock. Also, in these markets, electronic trading is not done much; most transactions are performed using high-touch trading and block desks. Neither do alternative trading systems (e.g. dark pools, crossing networks, and ECNs) play much of a role in Asian markets.

Instead, liquidity is perhaps the most pertinent issue affecting execution quality in Asia, especially for block trades, even though fragmentation in these markets is minimal compared with more developed regions. Emerging market infrastructures, the spread between bid and offer prices, and duties and other fees are sub-factors affecting access to liquidity and therefore execution quality.

However, you cut it, markets are becoming more and more interconnected, exacerbating execution quality problems. Some Asian markets have invested heavily in new technologies and state-of-the-art datacenters to begin addressing problems of transparency, speed, and ease of access.

Which brings us to the topic of network costs for financial markets. How does this relate to best execution?

According to Ian Salmon, market consultant at Accedian, there is an extent to which simply operating these networks
regardless of how well they performinvolves unavoidable fixed costs because of the fragmented nature of the Asian market and long physical distances between hubs.

And yet, the end user experience depends on how well network perform. Customers may be accessing the market in a variety of ways, and it’s necessary to ensure a seamless flow of data back and forth between front and back offices. As pointed out elsewhere, a performance-optimized network can help an operator get more bang for their buck, and simultaneously improve execution quality.

Incidentally, the same technologies and methodologies that can help financial network operators optimize their infrastructure use and keep pace with changing standards for execution quality, also come into play around conduct standards for market participants executing transactions. (WatersTechnology noted that there is an updated directive in MiFID II around methodology for tracking and proving execution quality to clients and regulators.) We’ve discussed this elsewhere, and refer you to the links below for a deeper look into the topic.

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