Best execution refers to the duty of an investment services firm (such as a
stock broker
A stockbroker is a regulated broker, broker-dealer, or registered investment adviser (in the United States) who may provide financial advisory and investment management services and execute transactions such as the purchase or sale of stocks and ...
) executing
orders
Order, ORDER or Orders may refer to:
* Categorization, the process in which ideas and objects are recognized, differentiated, and understood
* Heterarchy, a system of organization wherein the elements have the potential to be ranked a number of d ...
on behalf of customers to ensure the best execution possible for their customers' orders. Some of the factors the broker must consider when seeking best execution of their customers' orders include: the opportunity to get a better price than what Is currently quoted, and the likelihood and speed of execution.
In Europe, there has been an attempt to define "best execution" within the Markets in Financial Instruments Directive (MiFID), which introduces the principle that, when carrying out transactions on their clients' behalf, "investment firms
hall
In architecture, a hall is a relatively large space enclosed by a roof and walls. In the Iron Age and early Middle Ages in northern Europe, a mead hall was where a lord and his retainers ate and also slept. Later in the Middle Ages, the gr ...
take all sufficient steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Nevertheless, where there is a specific instruction from the client the investment firm shall execute the order following the specific instruction." MiFID II. Article 27 "Obligation to execute orders on terms most favourable to the client"
For most broker-dealers or execution agents, best executions are usually optimally constructed via either static or dynamic programming.
Benchmarks for "Best"
The keyword of "best" must be defined with respect to a chosen benchmark. The most common benchmark prices or costs are:
*Arrival Price - the price at the start of the execution, e.g., the mid price at 2:15pm when the execution starts. This is a ''pre-trade'' benchmark, known even before the execution is completed.
*Weighted Average Price - the weighted average price (WAP) of the market over the execution horizon. This is a ''post-trade'' benchmark, only available after the completion of the execution. The most common two WAPs are Volume-WAP (VWAP) and Time-WAP (TWAP). They are defined by for VWAP and for TWAP, where denotes the cumulative market volume at time , and