22 December 2014

Chris Pickles

Chris Pickles - Consultant

92Posts 205,632Views 15Comments

Proving best-execution compliance for all trades

06 February 2013  |  2794 views  |  1

Despite the growth of automated, electronic trading – whether high-speed or algorithmic or plain vanilla – voice trading is still a key element of markets in most asset classes, and in particular where trades need to be negotiated.  We’d all expect firms to keep archives of all electronic transactions, as with all of their computer data.  But what happens about voice trades?  And when your firm uses voice trading, how do you prove best execution?

These were topics that the industry raised in the run-up to the implementation of MiFID 1 over five years ago.  In the meantime the economic crash has led legislators and regulators to become even more firm about the principles that they laid down, and new regulations make it very clear that they extend to voice trading and not just electronic trading.

The UK FSA was one of the first regulators to require recording of desk-phone conversations with customers.  MiFID II drafts extend this requirement to mobile phones as well.  We are also now seeing the start of the same regulatory movement in the USA, with the Dodd-Frank Act requirements for the recording of all oral communications that lead to the execution of transactions in some asset classes.

Recording all elements of all transactions is a technical challenge in its own right.  But another challenge is in how firms are addressing the need to prove “best execution” when their communications with clients are spread across so many different types of media, and when they have to show internally that they are complying with their own customer agreements and documented execution policies.   And one shouldn’t assume that this is just an internal issue:  the US Consolidated Audit Trail system is intended to help regulators to monitor that firms are in fact doing what the regulations require.

TagsTrade executionRisk & regulation

Comments: (2)

A Finextra member | 08 February, 2013, 05:17

There is a larger question: whether regulators should limit the media of communication for trading purposes like IVR, email, dedicated phone number etc. 

Best execution is the interest of the business of the investors. They will invariably shift to secured channels of communications on which they can depend on in case of any disputes. 

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Chris Pickles - Consultant - England | 08 February, 2013, 10:18

One might tend to think that clients would move away from everything else and towards secure data exchange.  The reality is that voice communications is still used very much to negotiate trades and investment managers still use "old-tech approaches such as sending orders by hand-written faxes and using spreadsheets.  FIX Protocol is the most widely-used means of data exchange in the pre-trade, trade and clearing areas, but it still isn't used by every investment firm.  I think that we all need to encourage that situation to change and for all market participants to focus on moving to secure, standardised data exchange.

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job title Consultant
location England
member since 2009
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I help organisations that work in the financial sector around the world to understand better how the sector works, how regulations impact the business operations of financial institutions, and how to...

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