What is the best execution?
Brokers are responsible for giving an order execution that is most beneficial to their customers in the current market environment and conditions. This is a legal mandate, but even if it is not, they should always put the best interests of their clients. But what is the best execution? It has specific characteristics that the broker must assess, track, and record when choosing the equity route for an option or a bond order for execution.
Why is there such a law?
As we mentioned, best execution is not just something that follows good ethics. It is also a mandated law that ensures clients that their best interest will be put first. Why was this law created in the first place? Brokers are intermediaries between transactions, and they facilitate trades. Hence, many things depend on them, such as the execution’s trade route. Some brokers might think of their benefit since some entities executing trades may offer incentives if the brokers use their services. These incentives are not all similar. Some may even be soft dollars. Now, we understand why such a law is needed to be in place.
SEC is a body that ensures the brokers do not compromise the clients’ best interests because of the incentives that they can possibly get. And since this is a law, broker-dealers comply with this measure by reporting to the SEC on the trade routes of their client’s orders every quarter. They also submit reports about their execution quality every month. Another body that ensures clients’ best interest is the FINRA or Financial Industry Regulatory Authority, which conducts routine examinations and audits brokerage firms’ execution practices.
How can a broker conduct the best execution?
Brokers consider many factors before they can say that their execution is the best. We have the price, fee, and even information leakage.
- Price. The broker must be sure that the price he gets is the best from all the liquid sources he has.
- Fees. Is the source relatively cheap?
- Information leakage. Where can it be determined, and will it be leaked to hurt the cost of the executing positions?
What should a broker do?
Brokers should consider opportunities to take a better price than quoted, faster execution, and more likelihood of trade execution. Best execution is not all about getting the market price. Instead, the broker should also look at the aspect of time for settlement and the size of the trade. Brokers may receive massive orders from customers, and they should all assess them. However, investors and customers may also tell the broker their preferences. They can give directions on which exchange or market maker they prefer for the trade execution. This is a particular service, so, it may come with an additional charge. Customers can also request the routing practices policy from the brokers.
Today is all about:
The best execution refers to when brokers provide their customers with the most beneficial order execution. It is a law that requires brokers to place their customer’s best interests first before any reward or incentive that they can get from the trade routing entities. Brokers look at the opportunities for better prices better than the quoted one, execution speed, and trade execution potential.