Best execution
Investment firms must take all sufficient steps to obtain, when executing orders, the best possible result for their client. This obligation is known as the ‘best-execution obligation’.
This obligation means amongst other things that the investment firm must select the execution venue that offers the highest probability of the best possible result for the client. To do so, the investment firm takes a number of factors into account, such as the qualification of the client, the price of the financial instrument, the execution costs, the speed and the probability of execution and settlement, and the size and nature of the order.
Key features
The key features of the best-execution obligation that apply to investment firms and trading venues are:
• Investment firms are obliged to draw up a policy for their order execution. The policy must be clear and sufficiently detailed for the client and it must be written in a manner that is understandable. In addition, investment firms must constantly monitor the effectiveness of their policy. If it is found during the monitoring that the policy is not effective, the policy should be adjusted adequately.
• Investment firms must publish annually per category of financial instrument and per type of client the top five trading venues where they execute client orders and/or to which they transmit orders. In addition, based on their monitoring activities, they must prepare and publish an analysis of the quality of the execution per category of financial instrument.
ESMA has prepared Q&As for this topic, which can be found in the document ESMA Q&As Investor Protection (Chapter 1).