Investment firms have a fiduciary obligation to obtain the best possible result for their clients when executing orders. This standard is known as Best Execution.
Key Evaluation Parameters for Best Execution
Firms must assess multiple factors when route-planning and executing trades:
- Price and Execution Costs: Securing the most favorable asset price while minimizing clearing and exchange fees.
- Speed and Likelihood of Execution: Routing orders to venues that offer rapid execution to prevent price slippage, especially during high market volatility.
- Size and Market Nature: Planning the execution of large block trades carefully to prevent moving the broader market unfavorably.
Managing Conflicts of Interest
Firms must maintain a clear Conflicts of Interest Register to document potential risks, such as receiving payments for order routing (Payment for Order Flow) or trading ahead of client orders. If a conflict cannot be avoided, it must be disclosed to the client, or the firm must implement structural barriers (such as information barriers or “Chinese Walls”) to isolate the conflicted business units.
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