Countdown to MiFID II: What Comes After Compliance? (Part II)

By Jeremy Taylor, Head of Capital Markets Business Consulting, EPAM UK

Proving Best Trade Execution

With pre-trade transparency tackled in last week’s blog, we’re going to spend some time thinking about challenges facing banks in the trade execution stage, which is major because of the mandate from MiFID II to prove best execution for any transaction at any date and time.

Here are some key areas where banks should focus beyond compliance in the best trade execution stage…

Trade Quality Assurance

Another major area that MiFID II will impact is algorithmic trading in the trade execution stage of the lifecycle. MiFID II mandates regularly testing algorithms to ensure that they work as intended. Client connectivity and messaging will require additional fields and changes to order flows. FIX protocol messages – the current industry standard – will require modifications, which will mean that the format and content must be adjusted for compliance.

New rules for different asset classes, differences in venues, as well as drop copy reconciliation requirements suggest overhaul and revision to connectivity gateways and APIs. Before trades are reported to ARMs, breaks must be identified and remediated, so the alerts and reconciliations will need to be performed in near real-time.

Breach Identification & Alleviation

Ideally, the firms that provide brokerage and execution services across multiple asset classes should have a centralized, real-time view of activity and exposure. Firms must make sure that they have the capability to process and monitor a large volume of trade orders from multiple sources and venues. Some order flows may come through direct or sponsored access, meaning that there is an over reliance on pre-execution risk assessments.

To help alleviate the operational and compliance risks associated with the above scenarios, most venues will apply APIs to a ‘drop copy’ of all orders executed by the broker. APIs can be used to identify breaks, and reconcile transactions and events back to the broker’s internal records systems. To ensure accurate reporting and to notify about issues requiring remedial action, reconciliations must occur in real-time, which can be made possible by using FIX-based analytical tools and APIs.

Tighter best execution rules indicate the need for more granular timestamping. For some combinations of flows, firms will need microsecond precision to assess the true quality of best execution, and there are a variety of FIX tools available through the market to support high-resolution timestamps.

Ordering Process Overhaul

Additionally, MiFID II imposes more complexity and permutations in how individual client orders are processed. This increases the amount of reference data needed to determine the instrument type, whether it trades in a ‘liquid market,’ and whether the order is ‘large-in-scale’ (LIS) compared to the instrument’s ‘standard market size’ (SMS). This extra reference data must be sourced from both existing and new sources and made accessible to a firm’s OMS. Of course this information, along with instrument cost information, must be stored to support best execution evidence. As such, big data and cloud-based services offer great solutions to guarantee flexibility and scalability moving forward.

Upgrading order management systems as changes to business logic and underlying data models transpire will affect how orders are analyzed, executed, and reported. Furthermore, end-user interfaces will have to adapt into multi-asset, multi-venue smart trading platforms as a result.

In order to facilitate the execution of orders outside of regulated markets, it is anticipated that many brokers will become Systematic Internalizers (SIs). Trades executed through SIs will not be subject to some of the requirements associated with trading in dark pools. The obligations concerned with operating as an SI will demand implementing new technology, such as quote generation and market-making tools, to support them.

SIs must also provide the market with pre-trade quote publication in line with MiFID II’s pre-trade transparency requirements, as well as best execution order matching to published quotes. This becomes especially tricky with request-for-quote (RFQ) flows, as a client-originated RFQ needs to be accommodated with quote generation and pre-trade transparency obligations.


When MiFID came into force in 2007, the creation of MTFs and dark pools meant that equity markets became more fragmented and that liquidity was dispersed across a higher number of venues. In order to optimize order management and execution, smart order routers (SOR) were developed. Now, firms may consider employing a smart order routing capability based on machine learning to keep up with a fast-paced environment.

MiFID not only extends these requirements to non-equity markets, but also introduces more complex logic that needs powerful and sophisticated SOR technology. For example, new venues for block or LIS trades require new logic and work flows to support periodic auctions and indication of interest (IOI) order types compared to existing central limit order book models that operate under continuous trading. The introduction of these new order types and the commensurate complexity necessitate further investment in SOR platforms in order to encompass these new requirements.