MiFID II Best Execution Benchmarks
MiFID II best execution benchmarks are standardized metrics and criteria established under the Markets in Financial Instruments Directive II (MiFID II) to evaluate and demonstrate how effectively firms achieve the best possible trading results for their clients. These benchmarks require firms to consider factors like price, cost, speed, likelihood of execution, and other relevant criteria when executing orders.
Understanding MiFID II best execution requirements
MiFID II establishes comprehensive requirements for investment firms to achieve and demonstrate best execution. The framework requires firms to take "all sufficient steps" rather than just "reasonable steps" to obtain the best possible results for clients, marking a significant increase in regulatory expectations.
The core execution factors that must be considered include:
- Price of execution
- Total transaction costs
- Speed of execution
- Likelihood of execution and settlement
- Size of the order
- Nature of the order
- Any other relevant considerations
Best execution benchmarking framework
The benchmarking framework requires firms to:
Execution quality metrics
Key metrics used to measure execution quality include:
- VWAP - Measures execution price against volume-weighted average
- Implementation shortfall - Captures total execution costs including market impact
- Slippage - Measures deviation from arrival price
- Market impact cost - Quantifies price movement caused by the trade
Next generation time-series database
QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.
Venue analysis requirements
MiFID II requires firms to conduct regular assessments of execution venues, considering:
Quantitative factors
- Execution prices achieved
- Liquidity available
- Transaction latency
- Settlement efficiency
Qualitative factors
- Market structure
- Access models
- Operational resilience
- Clearing arrangements
RTS 27 and RTS 28 reporting
The regulation mandates two key reporting requirements:
RTS 27 reports
- Quarterly reports by execution venues
- Detailed execution quality metrics
- Price, cost and likelihood statistics
RTS 28 reports
- Annual reports by investment firms
- Top 5 execution venues per asset class
- Execution quality assessment
Technology and implementation
Firms must implement robust systems for:
Key technology components
- Real-time trade surveillance systems
- Transaction cost modeling tools
- Best execution policies monitoring
- Automated reporting solutions
Next generation time-series database
QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.
Challenges and considerations
Data management challenges
- Large volumes of market data
- Multiple venue connectivity
- Data normalization requirements
- Historical data retention
Implementation challenges
- Complex technology requirements
- Multiple asset class coverage
- Cross-border considerations
- Resource intensive monitoring
Market impact and evolution
The implementation of MiFID II best execution benchmarks has led to:
- Greater transparency in execution quality
- Enhanced competition between venues
- More sophisticated execution algorithms
- Improved client outcomes
These benchmarks continue to evolve as markets become more electronic and data-driven, requiring firms to constantly adapt their execution analysis and reporting capabilities.