Schroder Investment Management is busy reviewing processes around best-execution implementation, including looking to ensure it is paying commission rates in line with the services they get.
Jacqueline Loh*, head of Asia trading at the UK fund house, stresses that responsibility for best execution falls to the buy-side as well as the sell-side. It is not merely about achieving a best price – achieving best execution is an entire process that should be established within buy-side firm trading desks, she argues.
“Best execution must be the modus operandi going forward,” says Loh. “For a start, it is not a price, but a process. The process should include access to a variety of venues, probably made possible by commission-sharing agreements [CSAs] and commission unbundling. [There should also be] checks to verify that the process is working.”
One example of such a focus on price is seen in best-execution policy in the US. The order protection rule under the Regulation National Market System requires trading venues to prevent trades done at prices inferior to those quoted elsewhere.
Going beyond ‘best price’ and establishing a firm-wide best-execution process, Loh says she is a firm believer that execution independent of research can help her team deliver better value to clients – hence, the practice of unbundling and the use of CSAs.
“Since we started commission unbundling and commission-sharing agreements about six years ago, we have been able to focus on minimising impact costs with a combination of high- and low-touch execution,” says Loh. Her team has also been able to give brokers more detailed feedback on areas of their services.
Meanwhile, Loh welcomes requirements imposed this year by Hong Kong’s Securities and Futures Commission (SFC) on both brokers and buy-side firms to ensure the robustness of their trading algorithms and systems.
“It’s not a bad thing for buy-side firms to do due diligence on systems and algos provided by their electronic trading service providers, and the HK SFC regulations are comprehensive in this respect,” she says.
As for the current SFC consultation on dark pools, Loh agrees there could be more transparency around such alternative venues, such as the type of flow that goes into them and price improvement that can be achieved by crossing in them
The regulator started a consultation in February launched a consultation that seeks to unify the rules for operators of dark pools, each of which operate in the city under different licensing conditions at present.
Other proposals include enhancing the level of disclosure to dark pool users and introducing additional control, record keeping and reporting requirements on dark pool operators.
*A Q&A interview with Jacqueline Loh will feature in the forthcoming April issue of AsianInvestor magazine.