While best execution policies have become a contentious topic this past year in Europe and Asia in response to changing regulations, best execution frameworks are relatively well established in the United States.
However, the stringent requirements of MIFID II have resulted in 3 potential business implications in the United States:
New technology being developed to enable more streamlined compliance for enforcement of these restrictions.
Domestic asset managers with European-based clients will need to implement policies to maintain compliance with the MIFID II requirements for these relationships.
Forced reorganization of certain business lines in Europe will result in new business models for the distribution of research, asset management sales practices, etc.
The most positive news from the perspective of investment managers and retail investors alike, is that the latest technology innovations are enabling investment professionals to more effectively deliver best execution for clients. Best execution defined
According to the SEC, the duty of best execution requires broker-dealers to seek to execute customers’ trades at the most favorable terms reasonably available under the circumstances. Traditionally, price has been the primary factor in determining whether a broker-dealer satisfied its best execution obligations, but the SEC has stated that the broker-dealer should also consider additional factors, including:
The size of the order
The speed of execution available on competing markets
The trading characteristics of the security
The availability of accurate information comparing markets and the technology to process the data
The availability of access to competing markets
The cost of such access
FINRA requires that a broker-dealer use “reasonable diligence” and maintains policies to ensure “regular and rigorous” reviews around the quality of executions for their customers’ orders. Asset managers that qualify as investment advisors are compelled to comply with similar controls under the Investment Advisors Act of 1940.
While not required to perform order-by-order reviews, the FINRA rule requires firms who route orders for execution through other broker dealers on an automated, non-discretionary basis, to do periodic reviews, at least quarterly.
It’s all about the investors
Best execution is an investor protection, obligating investment managers to exercise reasonable care when executing a trade in order to obtain the most advantageous terms for the client. This is meant to provide investors with a clear directive for client service, particularly as it relates to trade execution. As clients have come to expect a sufficient amount of diligence on the part of investment professionals, it is critical for asset managers to have the data and reporting to explain how pricing was ascertained for a trade- they need to be covered in case there are any questions. When managers are delivering extremely strong execution metrics, reporting metrics are a great way to demonstrate the value they provide their clients. Ensuring you are in compliance
Utilizing best practices and tools can ensure you are not only delivering best execution but will help you articulate your value to clients or, if necessary, demonstrate your processes to regulators in the instance of an audit.
Aside from reasonable diligence, several other factors that must be considered when making a trade on your client’s behalf:
Portfolio management platforms’ pre- and post-trade tools are increasingly relied on by investment managers to evaluate pricing for potential trades and ensure best execution has been attained. As stipulated by the CFA, “New venues and new technology must be considered in the best execution analysis. The more portfolio managers understand about each venue, the better they can make informed decisions about best execution and establish the most appropriate best execution policies for their funds.”
The character of the market for the security
The size and type of transaction
The number of markets checked
The accessibility of the quotation
The terms and conditions of the order that resulted in the transaction
Below is a brief checklist outlining best practices for investment managers who are committed to delivering best execution for their clients:
Establish a best execution review committee and develop a written policy which outlines documentation requirements for testing and monitoring
Provide efficient access to live quotes on available inventory and executed trade prices for all portfolio managers, traders and middle office personnel
Subscribe to a multi-venue inventory service
Establish a reporting framework to communicate your best execution policies and procedures with clients
Providing a comprehensive best execution framework that enables managers to be successful requires a myriad of data feeds and portfolio reporting tools. Technology platforms make it easy so that investment personnel will not cut corners as part of the trade management processes. CBXmarket has the complete set of required quote and trade reporting coupled with flexible workflow management tools to complement any investment managers operational requirements. Contact us today to learn more.  Sidley Austin, FINRA and MSRB Issue Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets, December 9, 2015.
 Latham & Watkins, Global Developments on Best Execution, May 3, 2018.
 CFA Institute, Four Dangerous Myths about Best Execution, 2015.
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