I spent the holidays diligently researching the best brand of mince pies in order to settle a pre-Christmas debate here at the office. Naturally my criteria included a number of factors including (but not just) price and, perhaps surprisingly, the winner
was Tesco's in-house bakery. Back at work, my attention turned to my other favourite M word – MiFID II – as a colleague had sent me through the latest Q&A docs from ESMA whilst I was away. I noticed that the bar on best ex has been raised as firms are now
expected to take "all sufficient steps" rather than just "reasonable" ones to ensure compliance. Furthermore, firms are expected to "verify on an ongoing basis that their execution arrangements work well throughout the different stages of the order execution
process". ESMA triumphantly points us to RTS 27 to help, but this is just an annual report where firms set out their top 5 venues of execution.
Just like my festive research, any useful notion of "best" is impossible without knowing the full trading objective (i.e. the exact combination of price, size and secrecy for an order). But that's only half the problem as more venue-operated dark MTFs emerge
through 2017. These aim to trade in size but will do so infrequently thereby making any sensible measurement tricky at best and futile at worst. On top of this the market will require a new breed of smart router that can rest multiple orders in all the dark
venues and then yank them out as fills come in. This will need to be done in such a way that the senders are not accused of routing toxic flow to these venues, and done at speed so that the risk of getting overfilled is minimised (a big problem when you are
dealing in real size). And all of this will need to work in tandem with any parallel activity in the lit markets. Achieving this (let alone measuring it) will require knowledge of an order at the most holistic level and then constant communication between
the lit algos and the dark router that processes it.
It will be interesting to see how our industry sets about doing this and then measuring and presenting the results in a meaningful way.
As for me, I should be able to forget about the mince pies for another year – wish I could say the same about MiFID II.