Buy-Side Technology
The New Risk Management Tool Kit | BidRoute Placing Bet on Program Trading Automation | European Buy Side Wrestles With Best Execution | Where to Spend in a Time of Crisis |
European Buy Side Wrestles With Best Execution
February 2, 2009
Hedge fund managers in the European Union who think the Markets in Financial Instruments Directive (MiFID) guarantees they get best execution on their trades should think again, according to Richard Balarkas, CEO of Instinet Europe.
MiFID requires brokers to provide clients with an execution policy, but it doesn't specify what the policy must cover. So while major European investment banks such as Credit Suisse have developed advanced smart-order routing, others have shied away from making the investment. At a recent conference in London sponsored by the Securities Industry & Financial Markets Association, Balarkas noted that the buy side is becoming more sophisticated, acquiring or accessing better technology, and challenging brokers to prove they add value.
"Most brokers haven't gotten involved in smart-order routing," he said. "Hopefully they will go out of business."
Harry Gozlan, CEO of Paris-based Smart Trade Technologies, which offers a liquidity management solution, said that in a market where liquidity is spread across a few major and several minor venues, providing best-execution services is unimaginable without being able to source the prices from several, and route orders to the most appropriate.
Unlike Regulation National Market System in the U.S., MiFID doesn't require brokers to obtain the best price, just to have a policy. "It often is not worth the paper it is written on," asserted Balarkas in an interview. "The policy usually says nothing about which venues the broker will use, whether they smart-order route, and whether they pocket any price improvement or send the price improvement through to the client."
In effect since November 2007, MiFID is still in the early stages of development. And both regulators and brokers are taking their time to determine what exactly the directive means and how to implement it.
Broker Transparency
Balarkas, whose firm is a subsidiary of New York-based agency brokerage Instinet, said he believes that improvements in execution will come in response to buy-side users. "It only changes when clients demand it," he said. "Regulators can demand whatever they like. Certainly in the area of the market in which we operate, our standards of execution and diligence and transparency are way higher than anything any regulator has asked for. There is an awful long tail of laggards in the market on both the buy side and sell side who will continue to do the minimum possible to keep out of jail."
It isn't easy for buy-side managers to determine what brokers are providing when they trade on behalf of clients, added Balarkas. "A lot of the clients we speak to have been keen to find out what brokers do with their orders, but it is difficult to find out. Brokers haven't been volunteering that information."
Balarkas contends that bulge-bracket firms intended to use MiFID to match orders internally and save the fees they had previously paid exchanges. "They would be able to internalize all the flow, match it at low cost, trade against it and make proprietary revenues," he said. "The last thing they wanted to do was smart-route or even route an order to an external exchange where they are giving up the potential to get the other side of the order and a chunk of commission and have to pay exchanges to trade."
