Best Execution

What Best Execution means

Best execution is the obligation on a regulated firm to take all sufficient steps to obtain the best possible result for its clients when executing orders. The rule requires a firm to weigh price, costs, speed, likelihood of execution and settlement, size, nature and any other relevant consideration. For retail clients the best possible result is determined by total consideration, meaning the price of the instrument together with all costs of execution, which prevents a firm from advertising a tight headline price while recovering the difference through fees.

The duty is procedural as well as substantive. Firms must establish and publish an order execution policy explaining the venues or counterparties used and the relative importance of each execution factor, obtain client consent to that policy, monitor execution quality on an ongoing basis, and review the policy and arrangements at least annually or whenever a material change occurs. Firms must be able to demonstrate on request that a particular order was executed in line with the policy, and regulators have fined firms for failing to monitor or evidence this.

Best execution does not guarantee the best available price on any individual trade, and it never guarantees a profitable one. It does not prevent slippage in fast markets, requotes where the model permits them, or spread widening around news and at rollover. Where a client gives a specific instruction the firm satisfies the duty by following that instruction, even if a better outcome was available otherwise. For an over-the-counter broker acting as sole counterparty, the execution venue is effectively the firm itself, which makes independent comparison difficult.