Killik & Co - Top 5 Venue Reports 2018

Order Execution Quality Report - 2018

This Order Execution Quality Report supplements and should be read together with Killik & Co.’s annual Top 5 Venue Reports, which can be accessed via the above links. These reports demonstrate the top 5 venues in terms of trading volumes, for each of the classes of financial instruments in which we execute and transmit/place our retail and professional client orders. Collectively, these reports cover orders executed during the period 01.01.2018 to 31.12.2018.
Killik & Co publishes these annual reports in accordance with the requirements of the EU Markets in Financial Instruments Directive II (“MiFID II”) and the rules of our regulator, The Financial Conduct Authority (“FCA”).
This supplementary report is intended to provide context to our choice of execution venues, allowing our clients to better understand the analysis and conclusions we draw from our monitoring of the quality of execution obtained on these execution venues.
A useful glossary of terms can also be found in Appendix 2 of our Order Execution Policy.

Execution Factors

When assessing the quality of execution achieved, we pay due regard to the key factors considered by our Investment Managers or Dealers when determining the method and venues on which we execute our client orders. This is covered in more detail in the Killik & Co Order Execution Policy which can be found on our website. The key factors are:
  • Price: We will usually assume that best price is the most important outcome for our clients and this factor is always a primary consideration when determining the importance of the other factors.
  • Size: The size of the order may determine how an order can be dealt. Small, liquid orders are usually dealt via the Retail Service Provider (RSP) network, whereas large or illiquid orders are usually dealt using our Dealers’ expertise.
  • Order type: The type of order will impact the way in which an order is dealt, but not to the extent that price is no longer the most important execution factor in achieving the best possible outcome. For example, ‘at best’ orders are usually dealt via the RSP network, whereas ‘limit’ orders are usually published direct on LSE SETs order book. Additionally, if the client has specific directions, we will deal according to those instructions.
  • Speed: Although achieving the best price is key, sometimes being able to deal immediately may be of greater importance to the client.
  • Likelihood of settlement: Making sure we choose an appropriate counterparty that can deal with the specific type of order or financial instrument.
  • Any other consideration relevant to the execution of an order: It may not be possible to execute certain orders via the RSP network or via our Dealers, for example the financial instrument may be in a foreign currency or only available ‘OTC’. Such characteristics may determine how an order is dealt, but not to the extent that price is no longer the most important execution factor in achieving the best possible outcome of that order.
When considering price, we take into account the total amount that the client will pay, known as the ‘total consideration’, represented by the best available price for the financial instrument at that time, including any associated costs relating to the execution of that order. Regardless of client categorisation, we assume that total consideration is the most important outcome for our clients’ orders.
Other execution factors may be given precedence over the immediate price, but only where those factors are instrumental in delivering the best possible result to the client, for example where a client has given us an explicit instruction in relation to the execution of an order, or perhaps the speed of execution takes precedence over price. Such orders are rare, but where they do occur they are more likely to be from a professional client.
Where our monitoring identified trades where best price had not been achieved, this was always because another execution factor had taken precedence in order to achieve the best overall outcome for the client.

Client Categorisation

Our client base is predominantly ‘Retail’ with only a small proportion of our clients categorised as ‘Professional’ (Elective-Professional or Per Se Professional, as defined by the FCA).  The considerations for the execution of a client order may differ depending on whether the client is categorised as a retail or a professional client, but not to the extent that it affects our overarching obligation to achieve the ‘best possible result’ for the client.

The range of factors we consider when selecting an execution venue is the same whether the client is retail or professional. For our retail clients’ orders, we will always assume that the best price is the most important outcome. For professional clients, orders are typically larger in size and speed of execution may take precedence and impact how and where an order is executed. Whenever another factor is given precedence over price, total consideration will always remain the primary factor of consideration in determining the importance of the next relevant factor.

Our 2018 Top 5 Venues Reports demonstrates a broad consistency in the execution venues used across both retail and professional client types, and across the different classes of financial instrument. This correlation supports our consistent approach to client categorisation, in our consideration of the execution factors mentioned above.

The selection of ‘Execution Venues’

We execute our client orders either (or by a combination of) directly on a Regulated Market of which we are a member, e.g. the London Stock Exchange (LSE), or with third party investment firms referred to as Counterparties, RSPs and/or Market Makers (or in the context of this report, collectively; ‘Execution Venues’), or on rare occasions, outside of a Regulated Market only where we have obtained a client’s prior express consent.

The London Stock Exchange (LSE) remains the dominant UK exchange for both our retail and professional order flow. Our client Order Management System (OMS) routes UK order flow to the Retail Service Providers (RSP) network provided by Platform Securities LLP (our clearing, settlement and custody provider), for onward electronic trading. Quotes are systematically requested from those RSPs that Platform Securities have chosen to connect to, based on competitive pricing and financial stability. Based on the quotes returned our OMS will trade at the best available price. We therefore rely on the RSP network predominantly for ‘at best’ orders; to buy or sell at the best price available in the market at that time, and we will deal ‘at best’ unless; there is insufficient liquidity to execute that order, or; the client gives us a different specific instruction.

For large orders or illiquid investments that cannot be executed immediately through the RSP network (for example those that are outside of normal market size), we will use the expertise of our Dealers to choose the most appropriate venue for the order, taking into account the Execution Factors. Using a number of different price sources as an initial reference point, our Dealers will approach various Counterparties and Market Makers to try to negotiate a price improvement. Alternatively, an order may be worked direct on exchange, on the LSE’s SETS order book.

Analysis of our 2018 execution data confirms that dealing on LSE via the RSP network has consistently allowed us to obtain the best possible result for the execution of our client orders, when taking account of the execution factors mentioned above.

Execution and Placement/Transmission

As explained in the introduction to this report, MiFID II regulation requires Killik & Co to publish Top 5 Venues which among other things, differentiate between orders executed ourselves and orders ‘transmitted’ to, or ‘placed’ with, a third party for execution on our clients’ behalf.

From the outset, the type of financial instrument in question will ultimately impact the method of execution and it may not always be possible to immediately execute certain orders via the RSP network or via our Dealers. Instead, such orders may need to be placed with other counterparties, or transmitted to a third party using a smart order routing system, who have the ability to trade in those instruments. Such characteristics may determine how an order is dealt, but not to the extent that price is no longer considered the most important execution factor in achieving the best possible outcome of that order.

For electronic orders in non-UK (or ‘foreign’) listed instruments (primarily equities, fixed income instruments and exchange traded products), we use a third party smart order routing system (SOR) which facilitates direct access to international markets. Access to the SOR is provided to us by our Custodian. For large orders or illiquid investments that cannot be executed immediately through the SOR, we will use the expertise of our Dealers to choose the most appropriate venue for the order, by approaching a number of Counterparties known for their access to foreign markets.

The use of a smart order router is reflected in Killik & Co’s Top 5 Venue tables, where our SOR provider, UBS, is the only venue for placed/transmitted client orders throughout 2018, across all classes of financial instrument, for both retail and professional client types.

Venue Arrangements

There are no specific arrangements concerning discounts, rebates, or non-monetary benefits with any current execution venues, nor any close links, conflicts of interests, or common ownerships with respect to any execution venues used to execute orders. Whether we execute orders on behalf of our clients, or transmit those orders to a third party, the best possible result is determined in terms of the ‘total consideration’, representing the price of the financial instrument and the costs related to execution, including all expenses incurred by the client which are directly related to the execution of the order. However, any execution costs not included within the market ‘price’ of the financial instrument are borne by Killik & Co. Therefore, excluding our own ancillary charges, any additional costs related to execution such as execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of our clients’ orders, will not affect us achieving the best possible result for our clients.

All Counterparties that we choose to transact with are vetted before any orders can be placed with them. The vetting process looks at their financial position, regulatory status and any negative media. Those which have been approved are regularly monitored to ensure that they continue to meet requirements and will fulfil the ‘likelihood of settlement’ execution factor. The counterparty approval process does not guarantee best ‘total consideration’ in terms of price, as this is determined on a trade by trade basis, however we do regularly assess the performance of the counterparty relative to the wider market.

Killik & Co maintains a comprehensive up to date list of all our ‘Approved Execution Venues’, and a summary of the venues on which we place most reliance can be viewed in Appendix 1 of our Order Execution Policy. Killik & Co Dealers have a reliance on the counterparties detailed within the list but may, from time to time, seek to use additional counterparties where those counterparties can enhance the outcome for the client. All new counterparties must also go through the same approval process before dealing.

During 2018, there was little overall change to our Execution Venue list. The only notable difference was the addition of two new counterparties following the closure of Financial and General Limited and NCL Investments Limited, with whom a large proportion of our 2018 Fixed Income client orders were executed. King & Shaxson Limited and Bridport & Co have since been selected as suitable alternative venues, offering access to Fixed Income markets for both our retail and professional clients.

Analysis, Monitoring and Review

Killik & Co utilise an online data analysis tool called LiquidMetrix, provided by Intelligent Financial Solutions (IFS), to regularly review, analyse and track the quality and performance of our market execution data. IFS is a London based industry leader in financial market data research and execution quality analysis. IFS developed LiquidMetrix services specifically to provide firms like us with enhanced analysis of their execution quality and transaction costs, in order to meet the best execution obligations introduced under MiFID regulation.

To monitor and measure execution performance, LiquidMetrix benchmarks all Killik & Co client orders against the leading venues where there was an executable price available at the time of trade. We monitor the quality of our execution by regularly reviewing our trades through LiquidMetrix and investigating any client orders placed either side of the touch price (not within the bid-offer spread) thus not fulfilling the best price execution factor.

We do not allow a tolerance threshold to ensure that all outliers are sufficiently reviewed. Each exception is reviewed by Compliance and the Dealers to determine whether or not another execution factor took precedence to achieve best execution overall. Where necessary, exceptions will be repaired to ensure that our clients receive the best possible outcome from each transaction. The results of this monitoring are reported on a monthly basis to Senior Management for further escalation as required to the Executive Board.

The review and monitoring of our execution data is also used to determine the performance of the counterparties we use against the differing instruments we trade in, and assess whether we should continue to use them for that instrument. We also consider whether there are venues or counterparties that we should add that will enhance our dealing process and outcomes for our clients, where our data suggests a correlation in better execution outcomes elsewhere.

Our review Killik & Co’s order execution performance, covering all client orders during 2018, demonstrated the following key outcomes:

  • 95.97% of orders were better than, or equal to, the benchmark price. This is comprised of:

(i) 54.06% of orders which bettered the benchmark price;

(ii) 41.52% of orders which equalled the benchmark price;

  • 1.40% of orders could not be benchmarked. This was mainly due to the following reasons:

i) trades occurring at a time when there was no continuous trading on a venue (i.e. before or after a market open or close);

ii) trades occurring at a time when continuous trading was suspended on the main market, or whilst that market was in auction mode, or there was insufficient volume on a venue to execute a trade fully;

iii) no venue had sufficient volume to fully execute the size of the trade.

  • 3.02% of orders showed as worse than the benchmark price and required further investigation. The majority were found to be a result of the following reasons:

(i) a better price on a venue that Killik & Co does not currently have access to;

(ii) trade time discrepancies (For example, foreign stock time zone differences affecting the benchmark);

(iii) trades with non-standard settlement terms (not T+2);

(iv) misleading benchmarks or manual input discrepancies.

The overall analysis of our 2018 order execution data is consistent with our expectations, based on our ongoing monitoring throughout the year. Killik & Co is predominantly a retail investment management firm and so the consistent presence of mainstream RSPs across all our Top 5 Venue tables is an accurate reflection of our core retail investment business.

Our analysis also demonstrates that the London Stock Exchange (LSE) remains the dominant UK exchange for all our retail and professional order flow, with the volume of trades far exceeding any other exchange used, and 97.70% of orders executed on LSE being better than, or equal to, the benchmark price.

Our use of a smart order routing system for non-UK (or ‘foreign’) listed instruments is further supported through our analysis of counterparty execution; where 98.58% of UBS orders were better than, or equal to, the benchmark price.

Our monitoring and analysis of our 2018 execution data has not directly resulted in any changes to our Order Execution Policy, or the selection of counterparties or venues we rely on.