ASIC's proposal to introduce a best execution system on equity trades is a good start, but needs further sharpening to be successful, Instinet has said.
The practice in Australia to pay execution fees as part of a larger package has created a situation in which institutional investors are likely to pay too much.
Unless ASIC requires financial institutions to justify the value of services offered as part of a package, not much will change.
"There are some regulatory and market structure dynamics in Australia that impact the cost of trading for super funds," Instinet Asia-Pacific chief executive Glenn Lesko said.
"They are paying commissions on a variety of services of which execution is only one of them. There is no explicit guideline to say that you should treat each individual order solely on best execution and that impacts the trading costs of super funds implicitly and explicitly."
On the explicit level studies have indicated that institutions pay higher fees than in the rest of the world, while on the implicit side the lack of competition in execution fees has not driven down prices as much as they have been in the United States.
"There is more competition for these services in the US. Within the top 10 in the US you will find execution-only firms," Lesko said.
Last month, the corporate regulator released a consultation paper on the Australian equity market structure, which addresses the high costs of equity transactions.
"We propose a best execution obligation that requires market participants to take reasonable steps to obtain the best total consideration for their clients," ASIC said in its paper.
"Best execution obligations promote efficiencies by ensuring orders are directed to the venue offering the best result."
However, what was missing from the proposal was the emphasis on the dollar value of any auxiliary services, Lesko said.
"I think there needs to be more specific wording about best execution. In the US, what they have done is a system of accountability for the dollar value of commissions paid to anyone," he said.
"If you are paying a commission on top of execution costs, the SEC (Securities and Exchange Commission) requires you to be accountable to the owners of the assets for the value of those services."
He said the introduction of a best execution rule in some European markets had not had the desired effect, because the new rules lacked explicit requirements on dollar value.
"I see some signs that there is a recognition that there needs to be some change, but the general issue is that best execution has not been given the same attention as it has been given in the rest of the world," he said.
