Investment Operations

To Find Best Execution, Investors Seek More and Better Data

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Buy Side Plans to Request “Look-Through” Data Beyond Scope of New Broker Reporting Rules

Equity brokers who scrambled to meet new requirements on trade data reporting this year shouldn’t get too comfortable: Nearly three-quarters of institutional investors say they plan to request “look-through” trade data above and beyond that required by new SEC rules, according to a new report by Greenwich Associates.

In July, a new SEC requirement known as Rule 606(b)(3) took effect. The rule requires brokers to provide trade data to clients upon request that will help institutional investors in reviewing order-routing practices, assessing execution quality, managing potential conflicts of interest, and handling information leakage. 

The vast majority of buy-side firms (84%) plan to request 606(b)(3) reports, generally on a quarterly basis (73%). If a broker is unable to provide the requested data, not only will they be subject to regulatory oversight, institutions are also likely to penalize them with reduced volume.

In addition, 37% of the buy-side firms participating in a new study from Greenwich Associates say they expect Rule 606(b)(3) data to be important or very important to how they analyze their downstream trading. Smaller institutions are more likely than larger investors to view the data as important. 

“Larger firms have often already instituted integrated programs to analyze execution outcomes at a fine level of detail,” says Shane Swanson, Senior Analyst for Greenwich Associates Market Structure and Technology and author of Rule 606(b)(3) and Beyond: The Ever-Evolving Search for Good, Better and Best Liquidity. “The fact that these large firms were able to get such unfettered access when others might not get any data is one of the reasons that Rule 606(b)(3) was promulgated in the first place.”

Complex Market Structure Requires More Data, Better Tools
According to the report, the buy side needs more and better data to assess the rapidly expanding number of options now available for trade execution. In the last half of 2020, three new equity exchanges will launch in the U.S. alone. Add this to the thousands of algos, dozens of venues and the wide array of execution types, and the world quickly becomes a maddening place. With the implementation of Rule 606(b)(3) and other rules, regulators are doing their part to ensure investors have the data they need to navigate this complicated market structure. 

“For the sell side, it’s becoming increasingly clear that simply meeting minimum reporting requirements will not be enough,” says Swanson. “The brokers that succeed will be those that also provide analysis tools that help investors understand that data and trading tools that help them achieve best execution,” he added.