bestexecution

Best execution is the obligation for brokers to execute customer orders on terms that provide the most favorable overall result for the client, given current market conditions and the broker’s duty to act in the client’s best interests. It considers price, costs, speed, likelihood of execution and settlement, order size, and any special characteristics of the order. The standard is not a single price but a holistic assessment of the best possible outcome under the circumstances.

The concept applies to multiple asset classes, including equities, options, futures, and fixed income, with regulatory expectations varying by jurisdiction. In practice, brokers deploy smart order routing to split and route orders across multiple venues to seek price improvement and liquidity while balancing speed and certainty of fill. Decision factors include price improvement versus total cost, venue liquidity, order size, market impact, settlement risk, and potential conflicts of interest such as payment for order flow.

Regulatory frameworks outline how best execution is to be pursued and disclosed. In the United States, FINRA Rule 5310 requires brokers to seek best execution across venues, and Regulation NMS governs price protection and venue interactions; SEC Rule 606 and 607 mandate disclosures on order routing and execution quality. In the European Union, MiFID II imposes an overarching duty to obtain best execution and to report execution quality publicly.

Execution quality is typically evaluated using metrics such as implementation shortfall, price improvement, latency, and total execution costs. Debates exist around conflicts of interest, particularly related to payment for order flow, transparency of routing decisions, and the challenges posed by fragmented liquidity in modern markets.

See also: best execution policies, order routing, NBBO, payment for order flow, execution quality metrics.