Best Execution
Best execution is the obligation of broker-dealers to execute customer orders at the most favorable terms reasonably available under the circumstances, considering price, speed, and likelihood of execution.
Exam Tip
Best execution = broker must get best OVERALL terms, not just price. Consider speed, size, likelihood. It's an obligation!
What is Best Execution?
Best execution is a regulatory requirement that broker-dealers must seek the most advantageous terms for customer orders. This doesn't necessarily mean the absolute best price, but rather the best overall execution considering multiple factors.
Best Execution Factors
| Factor | Description |
|---|---|
| Price | The execution price relative to market |
| Speed | How quickly the order is filled |
| Size | Ability to fill the entire order |
| Likelihood | Probability of successful execution |
| Cost | Commission and other transaction costs |
Regulatory Framework
| Regulator | Requirement |
|---|---|
| SEC Rule 606 | Quarterly routing reports disclosure |
| FINRA Rule 5310 | Best execution obligation |
| NMS Rule 611 | Order protection rule |
Order Routing Considerations
When routing orders, broker-dealers evaluate:
| Consideration | What It Means |
|---|---|
| Market Center | Which exchange or venue to use |
| Rebates/Fees | Payment for order flow considerations |
| Execution Quality | Historical fill rates and price improvement |
| Market Conditions | Volatility, liquidity, spread |
Best Execution vs. Payment for Order Flow
| Aspect | Best Execution | PFOF |
|---|---|---|
| Focus | Customer benefit | Revenue for broker |
| Requirement | Mandatory obligation | Permitted practice |
| Disclosure | Required | Required |
| Potential Conflict | Must prioritize customer | May create conflicts |
Documenting Best Execution
Broker-dealers must:
- Conduct regular reviews of execution quality
- Compare results across market venues
- Document decision-making process
- Update routing policies as needed
Common Violations
| Violation | Example |
|---|---|
| Price | Executing at worse price than available |
| Delay | Unreasonable delay in execution |
| Routing | Routing based on rebates vs. quality |
| Documentation | Failure to review execution quality |
Study This Term In
Related Terms
Market Maker
SecuritiesA market maker is a broker-dealer firm that stands ready to buy and sell a particular security at publicly quoted prices, providing liquidity to the market by maintaining bid and ask prices throughout the trading day.
Market Order
SecuritiesA market order is an instruction to buy or sell a security immediately at the best available current price, guaranteeing execution but not the price.
Limit Order
SecuritiesA limit order is an instruction to buy or sell a security at a specified price or better, guaranteeing the price but not guaranteeing execution.