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FLASHBACK FRIDAY: A Closer Look at Best Execution

Flashback Friday sponsored by Instinet

Traders Magazine Online News, January 25, 2019

John D'Antona Jr.

Best execution. What does it mean, exactly?

Brokers and the buy-side can have very different views on what the term “best ex” can mean and how to achieve it. However, that doesn’t stop the market’s regulators from passing rules and codes of conduct geared towards the opaque and vaguely defined concept.

Best execution is not necessarily the best price. It is not something that can be measured on a trade-by-trade basis. Instead, it is a process that is not quantifiable, but is a set of quality standards, according to many.

Best execution for firms refers to a trading process firms apply that seeks to maximize the value of a client's portfolio given each client's stated investment objectives and constraints. This is part of a report and a set of trade management guidelines put out back in 2003 issued by a task force of the Association for Investment Management and Research (AIMR).

Back then AMIR declared the following new guidelines should be adhered to:

* Establishment of trade management policies and procedures that seek to maximize the value of client's portfolio within that client's investment objectives and constraints. 

* Establishment of a trade management oversight committee. 

* Implementation of firm wide trade management policy or policies. 

* Implementation of a trade evaluation process. 

* Establishment of clear firm-wide guidelines on broker selection and development of an approved brokers list. 

* Firms should clearly disclose the actual and potential conflicts of interest that arise from step-outs, research obtained through soft dollars and interest in or material business relationships with market making firms.

Back then it sounded like a tall order and some felt too strict to comply with.

So, what has changed, if anything?

Jack Miller, Chief Operating Officer of Equities at Robert W Baird & Co, told Traders Magazine that it is hard to overstate the changes that have occurred in the equity trading space in years since the AIMR guidelines were published.  Especially with the advent of Reg NMS – and the related proliferation of trading venues and fragmentation that followed – evaluation of best execution has become correspondingly nuanced and complex.

“As a broker-dealer providing research and execution services to institutional investors, we’ve seen most of our clients adopt practices for broker selection and trade management that align with the AIMR recommendations,” Miller began. “That hasn’t changed.  What has changed are the inputs and level of rigor placed around clients’ best execution processes.”

While access to services like research and corporate access are still important drivers of trade allocation, with MiFID II this became much less so in 2018 and will continue to decline over time, Miller continued.

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