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New Trade Routing Data Is Just First Step 

In July this year a long-awaited rule from the US Securities and Exchange Commission came into full effect with the aim of helping the buy side achieve better execution by getting more data and information about their trades.

Rule 606(b)(3) requires a broker-dealer to disclose routing and execution data for not held orders over the previous six months if a customer asks for the information.

However this is likely to be just the first phase in the buy side using more sophisticated analytics to improve execution as electronic trading becomes more sophisticated and the choice in how orders are executed continues to increase. For example, in the last half of this year three new equity exchanges have launched in the U.S. and new order types are being introduced.

Joe Wald, BMO Capital Markets

Joe Wald, co-head of electronic trading at BMO Capital Markets, told Markets Media the rule is a great step in helping all investors achieve a greater level of transparency.

“The rule has been well-received and it has really democratized the standardization of this level of transparency to all market participants, regardless of their size or resources,” he added.

Shane Swanson, an equities and financial technology expert in the market structure and technology practice at consultancy Greenwich Associates, agreed that the intent and purpose of the codification was to allow large and small institutions to have discussions with their brokers in order to validate the execution protocol they are using across the board.

“They will be asking themselves how can we find out if execution is good, bad or indifferent?” Swanson said.

Wald expects that in the next 12 months the buy side will be requesting additional data that is not mandated in the new reports.

Fully 84% of buy-side firms plan to request reports under the new rule, generally on a quarterly basis according to a survey from Greenwich Associates. In addition, a majority of buy-side respondents anticipate requesting data extending beyond the 606(b)(3) requirements within the next year.

Ray Ross, co-head of electronic trading at BMO Capital Markets with Wald, told Markets Media: “It’s quite clear that we’re in the first inning here. We are just getting started with how powerful transparency, collaboration and discussion can be in terms of improving outcomes.”

Shane Swanson, Greenwich Associates

Swanson also highlighted that more than 70% of survey respondents said they will want additional data. “Call it end-to-end or cradle-to-grave but investors will want data from the very beginning to the very end of every order type,” Swanson added. “The industry needs to be thinking about to ensure the readiness to go to that next level.”

It will take time for market participants to incorporate the data into their processes so they  can start building a historical reference point over time. They will be able to use the new data to populate their own reports together with their own specific information to enhance their view.

Wald said: “The implications are pretty clear. People are going to be taking a much more data-driven approach towards their algorithm and execution quality choices.”

Ross continued that the next step, following receipt of the data, is to develop analytics. “As the data becomes standardized, it becomes a lot easier to start visualizing that information and being able to extract real power and value,” he said.

Greenwich said that broker-dealers are going to need systems to ingest, analyze and report on each execution on every child order they handle, in order to provide actionable insights to their clients.

“Moreover, that data needs to be presented in a manner that both provides explanatory power for the trading decisions made and also presents the context in which they were done,” added the report.

Ray Ross, BMO Capital Markets

The consultancy said the brokers that succeed will be those that have good data technology—both from a trading and a data management perspective – and those that offer the broadest access to the most desirable liquidity (as defined by the client) with the most robust service.

Ross added: “Investors are going to start asking brokers for even more information. The brokers that are able to answer quickly and make changes are going to be the winners in this new world.”

The report, Rule 606(b)(3) and Beyond: The Ever-Evolving Search for Good, Better and Best Liquidity, can be downloaded here.