Best execution
Best execution refers to the obligation of an investment services firm (such as a stock broker) executing orders on behalf of customers to ensure that the prices those orders receive reflect the optimal mix of price improvement, speed and likelihood of execution. Brokers with customer orders are obligated to send orders to venues with the optimal "best execution stats." However, despite reams of regulation, best execution remains an elusive concept. A recent survey, conducted by London-based capital markets consultancy GreySpark Partners in association with Best Execution magazine, shows it all depends on your perspective. For the buyside contingent, price is the main factor but low latency and access to liquidity are the prime objectives in the sellsidecamp. The common link is to achieve the best outcome for clients and to navigate the never ending stream of new rules that are reshaping the trading landscape.
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[edit] Evaluating best execution
In order for a brokerage firm to determine its compliance with the best execution requirement, the brokerage must evaluate the orders it receives from all customers in the aggregate and assess which competing markets, market makers, or electronic communications networks (ECNs) offer the most favorable terms of execution. Ultimately, the decision on best execution is made by selecting preferences of market centers or counterparties who consistently meet or exceed certain benchmarks for quality.
Some of the factors a broker needs to consider when executing its customers' orders for best execution are these: the opportunity to get a better price than what is currently quoted, the speed of execution, and the likelihood trade will be executed.[1] Best execution is often mistaken for trading at touch price without taking into consideration factors such as the size of trade or settlement period.
[edit] Related definitions
Price improvement – the opportunity, but not the guarantee, that an order will be executed at a better price than what is currently quoted publicly. Price improvement is an evaluation of a market center that is calculated over time, and is compared using probabilities. [2]
[edit] See also
- Markets in Financial Investments Directive is a European Union Directive which, among other things, solidifies best execution regulations.
- Exchange (organized network)
[edit] External links
- TCA in Europe - Edhec Risk Advisory survey
[edit] Sources
- "U.S. Securities and Exchange Commission". Best Execution. http://www.sec.gov/answers/bestex.htm. Retrieved 2006-04-12.
- "U.S. Securities and Exchange Commission". Trade Execution: What Every Investor Should Know. http://www.sec.gov/investor/pubs/tradexec.htm. Retrieved 2006-04-12.
