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Overview of Best Execution:
It sometimes comes as a surprise, even as a disappointment, that the regulatory rule book should contain a rule on ‘best execution’. Most brokers would consider getting the best result for their client to be a job spec rather than a regulatory requirement.
Perhaps even more surprising is that the rule doesn’t say what a lot of people expect it to. A lot of people expect this rule to require firms to get the best price when they deal for their clients. IT DOESN’T. It is perfectly possible to comply with this rule while never actually getting the best price in the market. There are two reasons for this.
First, however good you may be, you may not be the best. And if you are, nobody else can be. There is no field of human endeavour in which it is possible for everybody to be the best all the time. If 100 shares are on offer in the market and two brokers simultaneously get an order to buy them, only one broker will be able to fill the order.
Second, and perhaps more important, very few clients really want execution at the best price. Even at the retail end of the market, with which the regulator is rightly most concerned. Perhaps because they assume that best execution means they will get the same (best) price whoever they use, all the evidence suggests that retail clients tend to compare brokers on the basis of commission levels. And to an extent, rightly so. Commission for retail customers may be up to 2% of the transaction value. Or it may be a relatively small fixed charge. Stockbrokers do, of course, provide other services such as advice. But considering execution only, it would be folly to pay an extra 1% of commission to save ¼% on the price. What matters for most retail customers is the total price they pay including all costs.
And those costs could be substantial. Many of the most liquid shares are now traded on dozens of different platforms. The cost, particularly to a small broker, in terms of time and connectivity, of checking the price on all of those platforms would be prohibitive. And, considering the time involved, the chance of actually getting the best price would be slim.
For non-retail customers, meanwhile, the considerations may be different. If they are active players who believe the market is about to move significantly and who want to trade before it does, speed and certainty of execution may be more important than price.
What the rule requires, then, is that you methodically seek to obtain the best outcomes for your clients on a consistent basis.
To do this you have to:
And of course you must:
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