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The Best Execution Myth

MiFID has been in for a few years now and it's had a tremendous impact on European markets but unfortunately not all good. The very laudable objectives that MiFID addresses really cause the failure of those objectives. For example Best Execution once easy to measure and prove is now virtually impossible due to the fragmentation of trading venues allowed by MiFID.

When there is a central market it is easy to provide a definitive price for valuation and regulatory inspection at any second of the day. But with today's fragmentation, although technically possible if there has been gigantic investment in technology by both buy and sell sides, the reality is, this is not the case.

Creating competition is a good thing for markets but in the Stock Market new competition does not necessarily mean lower prices. To be fair the introduction of MTFs, Dark Pools and others has pushed the traditional Stock Exchanges harder then they have ever been pushed before. The result has been investment by Stock Exchanges in new technology able to compete with the new electronic exchanges in speed and pricing, is falling.

The reduction of pricing that has materialised and the closing of spreads since MiFID were all anticipated during MiFID's drafting but the problem is that none of these benefits are finding their way back to the investors. The new set up has therefore failed unless the investor can see proof of best execution and have confidence in the market. We are now left with a situation where the investor simply does not to know if they have received best execution but worse still they are unaware that their broker or asset manager cannot categorically prove best execution. This was of course noted during the run up to MiFID implementation with Best Execution policies deliberately worded to cater for just this impossible situation, post MiFID. Not really in the spirit of the directive I think!

With transparency a casualty of MiFID and the chances of proving Best Execution or even getting a accurate value gone, due mainly to the Indexes not including MTFs and therefore not being representative of the true market. Where is the gain for the investor and the market?

It is an ongoing debate that the overall solution is to have a consolidated tape including all recognised trading venues. This is common sense and a no brainer solution, yet it is failing to gain total market support. My guess is that as MiFID 2 comes into view the consolidated tape will become a reality and mandatory. So why does the Securities Industry wait to be told what to do, rather than accept the inevitable and introduce a solution? Until the consolidated tape is introduced, the term Best Execution will remain just a myth.


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