Understand Best Execution (In Less Than 2 Minutes)



Best execution: what is best execution? Best Ex is the determination of how well a trader performed when buying or selling a security. Transactions include: price, timing, size or order, etc.

Regulators care about Best Ex because they want to be sure that money managers are doing a good job when they invest money for their clients. In fact, if your firm has an equity based business, you are probably using a tool or product that gives you a transaction cost analysis — or TCA report — which evaluates Best Ex.

Part of determining that money managers are doing a good job, is to make sure that traders pay competitive broker commissions to trade securities on behalf of their clients. Didn't traders already do that? Not necessarily.

Why else would they choose a broker?

Brokers can offer "soft dollars" to a trader of firm. Soft dollars are like credits firms can use to buy other services. Isn't that sort of like a kick-back? That's was how the regulators eventually viewed it. Many firms have phased out their soft-dollaring programs together.

New directives like MiFID II now require that money managers get permission from clients and set up special research payment accounts so clients understand, agree, and budget for research — or opt out.

As of April, 2018, EU regulators require that money managers be able to prove, on-demand, they have achieved best ex for their client. If money managers have been tracking this stuff for years to figure out traders performance, it shouldn't be that hard to do, right?

Yes, for most equities. Fixed income is a bit more complicated. To understand why, watch our fixed income execution video (coming soon!)


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