Regulators and institutional investors are demanding that buy-side firms demonstrate “best execution” for fixed income instruments. But defining the term in a fixed income context is rather subjective. While regulators are working on a detailed definition that includes price, costs, speed and likelihood of execution, Article 27 of MiFID II currently defines best execution as the “obligation to execute orders on terms most favourable to the client”. SEC guidance is only a bit more specific, and focuses more on price and commissions as opposed to multiple factors addressed by the European regulators.

Demonstrating best execution across fixed income instruments and sectors is difficult for several reasons. Compared to the highly liquid equity markets, that trade a relatively small number of issues electronically, the debt markets comprise a far larger universe of mostly illiquid instruments, the majority of which are still voice traded. The diversity of debt instruments adds further complexity. High yield European credits trade quite differently than US Treasuries, and exhibit a much different liquidity profile. The halting adoption of electronic best execution methodologies is closely linked to a third obstacle: the lack of comprehensive trade, quote, venue and counterparty data needed to analyze and evaluate execution quality. Without a framework in place for capturing and analyzing trade data it’s difficult to establish an objective definition of best execution.

An OEMS provides visibility into the full trade cycle for all orders, not merely a portion of the orders that most vendors and venues are limited to. The ability to archive and analyze detailed order and trade history for a name directly in the OEMS is an important recent innovation. Charles River’s Investment Management Solution provides fixed income traders, portfolio managers, and compliance officers with a powerful tool for analyzing post trade execution data. A comprehensive, timestamped picture of price, quote, inventory axes and counterparty data is captured for each trade. Appropriate reference prices and calculation options are applied to provide a context for each trade’s execution quality. This analysis is then archived within the OEMS and can be accessed via detailed order level reports whenever that name is traded in the future. Highly configurable, the tool allows different data sources to be incorporated based on an instrument’s trade history, sector and liquidity profile.

Given the significant differences in liquidity profiles, electronification and data availability across fixed income instruments and sectors, it’s understandable that regulators are still grappling with a detailed definition of best execution. But buy-side firms seeking greater visibility into execution quality can already benefit from tools that capture critical trade and quote data, and make that data accessible and actionable directly from the OEMS. Armed with these capabilities, firms will be well positioned to demonstrate best execution once MiFID II definitions are finalized.

Visit the Order and Execution Management page to learn more.