Exchange Axis Best execution outsourcing in a post-MiFID landscape Strictly Confidential © Exchange Axis Limited

Agenda What is ‘Best Execution’? Why is it difficult/costly to acheive? How can it be outsourced? What other processes can be outsourced? Questions?

The Intelligent Fabric of Best Execution What is ‘Best Execution’?

MiFID Best Execution obligation Under the Rules, a firm must take all reasonable steps to obtain the best possible result when executing client orders in the absence of specific instructions. Firms cannot opt out of the obligation even for professional clients. However, services provided to eligible counterparties are exempt from the obligation (except when providing investment advice).

MiFID Best Execution obligation MiFID Article 21 places an obligation on brokers (service of reception and transmission of orders for execution) to execute orders on terms most favorable to the client; Best Execution. 21(1) Investment firms require to take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature of the order or any other consideration relevant to the execution of the order. Whenever there is a specific instruction from the client the investment firm shall execute the order following the specific instruction. 21(2) Investment firms require to establish and implement an order execution policy to allow them to obtain, for their client orders, the best possible result.

MiFID Best Execution obligation 21(3) The order execution policy shall include, in respect of each class of instruments, information on the different venues where the investment firm executes its client orders and the factors affecting the choice of execution venue. It shall at least include those venues that enable the investment firm to obtain on a consistent basis the best possible result for the execution of client orders. 21(4) Investment firms require to monitor the effectiveness of their order execution arrangements and execution policy in order to identify and, where appropriate, correct any deficiencies. In particular, they shall assess, on a regular basis, whether the execution venues included in the order execution policy provide for the best possible result for the client or whether they need to make changes to their execution arrangements. 21(5) Investment firms require to be able to demonstrate to their clients, at their request, that they have executed their orders in accordance with the firm's execution policy.

MiFID Level 2 Level 2 Directive - “investment firms should apply their best execution policies to each client order that they execute with a view to obtaining the best possible result for their clients in accordance with their policies” Background note “trades should be driven to those venues that can consistently provide the highest quality results, and the best execution obligation ensures that firms are not able to ignore such venues”

Market liquidity Does it equal Best Execution? Individual wishes to buy a top of range TV on the Internet and gets Market Data of: on the Internet and gets Market Data of: Price, Postage and Packing (Clearing and Settlement) and Stock availability (Liquidity) Price, Postage and Packing (Clearing and Settlement) and Stock availability (Liquidity) Two options A – price £899, P&P £25, 50 available A – price £899, P&P £25, 50 available B – price £910, P&P £0, 1 available B – price £910, P&P £0, 1 available Likelihood is identical as both have stock Likelihood is identical as both have stock Most liquid = A BUT Best Execution = B (Note: A had the best price)

From Best Execution Obligation To Proof of Best Execution Reporting to Regulators Take all reasonable steps Take all reasonable steps Obtain best possible result Best execution obligation Monitor effectiveness Correct deficiencies make changes Correct deficiencies make changes Execution Policy Proof of Best Execution Proof of Best Execution Reporting to Clients & TCA Reporting to Clients & TCA Follow client’s specific instructions

Best Execution Execution Venues Relevant factors Execution Venues Factors affecting choice of venues Results on a consistent basis Info on various execution venues Info on various execution venues Execution Parameters Execution Parameters Execution Policy Best Execution Filtering of Execution Venues

‘Best Execution’ easy? With multiple venues for the same instrument this is not easy. ‘Best Execution’ is very important, but is it differentiating? Conclusion: Important but not differentiating therefore ripe for outsourcing

The Intelligent Fabric of Best Execution What is ‘Best Execution’?

client order one single market execution One client order through ‘Exchange Axis’ can result in one single market execution The Exchange Axis Approach ‘Best Execution’ & fragmentation LSE SWX Europe Open Match Euronext Amsterdam Client Deutsche Boerse Plus Markets “Local Market” TurquoiseChi-X Euronext Paris Best Execution Equiduct Milan Client’s order Venues scanned Executed order

Or… client order multiple market executions one client order through ‘Exchange Axis’ can result in multiple market executions LSE SWX Europe Open Match Euronext Amsterdam Client Deutsche Boerse Plus Markets “Local Market” TurquoiseChi-X Euronext Paris Best Execution Equiduct Milan Client’s order Venues scanned Executed orders Multiple executions in multiple markets The Exchange Axis Approach ‘Best Execution’ & fragmentation

Dynamic Portfolio Trading Dynamic Implementation Shortfall Genetic Algorithms “Neuroalgorithm” (Neural-Algorithms) Enhanced Electronic Execution Pegging Icebergs Time and volume slicing Sweeps Algorithmic Trading VWAP & TWAP Enhanced MOO & MOC Participate (Inline) Implementation Shortfall Transaction Cost Analysis Proof of Best Execution & Reporting Automation of tactical and strategic trading decisions Alarm-triggering algorithms Order-triggering algorithms Predatory, “Search & Strike” Algorithms Statistical based trading Pre-trade analytics Model generation Data-flow analysis Correlation assessment News-flow algorithms Internal Routing External Routing Exchange Routing The Intelligent Fabric of Best Execution Fictional Trade Pre-tradeAutomated (Strategy) TradingSmart Routing SystemsAutomated ExecutionAdvanced ExecutionPost-trade

The Intelligent Fabric of Best Execution What else could be outsourced?

What are the criteria? Can be very important Can be very important Cannot be differentiating Cannot be differentiating Outsourced partner must have significant Outsourced partner must have significant competence in the area competence in the area NEVER outsource a problem! NEVER outsource a problem! Don’t forget to manage the outsourced Don’t forget to manage the outsourced process, it is not sign and forget! process, it is not sign and forget!

Questions?