Best Execution
Encyclopedia
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."
s, 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.http://www.sec.gov/answers/bestex.htm best execution is often mistaken for trading at touch price without taking into consideration factors such as the size of trade or settlement period.
http://www.sec.gov/investor/pubs/tradexec.htm
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
) executing orders
Order (exchange)
An order in a market such as a stock market, bond market, commodity market or financial derivative market is an instruction from customers to brokers to buy or sell on the exchange.These instructions can be simple or complicated...
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."
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 makerMarket maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
s, 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
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
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.http://www.sec.gov/answers/bestex.htm best execution is often mistaken for trading at touch price without taking into consideration factors such as the size of trade or settlement period.
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.http://www.sec.gov/investor/pubs/tradexec.htm
See also
- Markets in Financial Investments DirectiveMiFIDThe Markets in Financial Instruments Directive as subsequently amended is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area...
is a European UnionEuropean UnionThe European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
DirectiveEuropean Union directiveA directive is a legislative act of the European Union, which requires member states to achieve a particular result without dictating the means of achieving that result. It can be distinguished from regulations which are self-executing and do not require any implementing measures. Directives...
which, among other things, solidifies best execution regulations. - Exchange (organized network)
External links
- TCA in Europe - Edhec Risk Advisory survey