Best execution

Best execution refers to the duty of an investment services firm (such as a stock broker) executing orders on behalf of customers to ensure the best execution possible for their customers' orders. Some of the factors the broker must consider when seeking best execution of their customers' orders include: the opportunity to get a better price than what is currently quoted, and the likelihood and speed of execution.

History

In 1975, the United States Congress passed the Securities Acts Amendments of 1975, authorizing the

U.S. Securities and Exchange Commission to facilitate a national market system. This led to the established in 2005 of Regulation NMS which was intended to assure that investors receive the best (NBBO) price executions for their orders by encouraging competition in the market.

In Europe, in 2014 there has been an attempt to define "best execution" within the Markets in Financial Instruments Directive (MiFID), which introduces the principle that, when carrying out transactions on their clients' behalf, "investment firms [shall] take all sufficient 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 or any other consideration relevant to the execution of the order. Nevertheless, where there is a specific instruction from the client the investment firm shall execute the order following the specific instruction." MiFID II. Article 27 "Obligation to execute orders on terms most favourable to the client"

For most broker-dealers or execution agents, best executions are usually optimally constructed via either static or dynamic programming.

The focus on best execution by regulators has been blamed for unintended consequences, including the rise of high-frequency trading.

Benchmarks for "Best"

The keyword of "best" must be defined with respect to a chosen benchmark. The most common benchmark prices or costs are:

Arrival Price - the price

p

0

{\displaystyle p_{0}}

at the start of the execution, e.g., the mid price at 2:15 pm when the execution starts. This is a pre-trade benchmark, known even before the execution is completed.