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.[1]

In Europe there has been an attempt to define "best execution" within the Markets in Financial Instruments Directive (MiFID), which introduces the principle that all financial services firms carrying out transactions on their clients' behalf: "must take all reasonable steps to obtain the best possible result, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order."[2]

For most broker-dealers or execution agents, best executions are usually optimally constructed via either static or dynamic programming. [3] [4]

Evaluating best execution

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.

Best execution is often mistaken for trading at market 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.

See also

Sources

  1. ↑ http://www.sec.gov/answers/bestex.htm
  2. ↑ http://www.fsa.gov.uk/about/media/notes/bn020.shtml
  3. ↑ Jackie Shen (2013), A Pre-Trade Algorithmic Trading Model under Given Volume Measures and Generic Price Dynamics (GVM-GPD), available at SSRN or DOI.
  4. ↑ Jackie Shen and Yingjie Yu (2014), Styled Algorithmic Trading and the MV-MVP Style, available at SSRN.
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