The cost of compliance has continued to increase over the past few years with a myriad of regulations aiming to achieve greater transparency in the market place. Looking at MiFID in particular, the major goal for regulators when scoping this was introducing the idea of best execution to ensure an even playing field for all participants.
In the past the buy-side has more or less passed the obligation of best execution to the sell-side and this has resulted in major infrastructural changes. Smart order routers, algo servers and low latency networks were generalised as we witnessed major shifts from high touch trading to low touch trading. From human to electronic, the shift towards achieving best execution is firmly underway.
However this move is not without its challenges. A major drawback has been around the total cost of transactions. Each time a new execution venue (be it light or dark) is added it multiplies the IT investment required and increases the overall cost of executing. With budgets already being squeezed, firms are having to dig even deeper than before. Another challenge is by focusing resources on execution in the front office, the middle and back office may suffer as a knock-on effect. Making sure all parts of the business receive equal attention is imperative to the smooth running of any organisation.
Today, the biggest challenge in achieving best execution depends on the level of complexity. Firms need to implement the right infrastructure and ensure they comply with existing regulations as well as those on the horizon. To complicate things even further, no single firm can now afford to trade on just one market. By trading on a regional or worldwide scale, different specifications for each market need to be taken into account. Firms need to look at how to gain access in a cost effective manner whilst maintaining a lead over competitors.
In a constantly evolving market, to be successful the buy-side needs to show greater strategic prowess and vision. IT skills must now be harnessed to work alongside marketing and commercial expertise to ensure survival. Being agile and investing in advanced technology will ensure more control over success in the marketplace.