The Best Execution Responsibilities of Investment Firms

Investment firms these days face the new challenge of the requirements under MiFIDII on how to achieve the best possible result when executing client orders. Continuing the sequence of our MiFID II articles on product governance and client categorization; in this article, we explore the best execution obligations and the key stages in a trades’ lifecycle; the ‘Pre-Trade’ and the ‘Post-Trade’ stage.

It is becoming increasingly frequent to hear buzzwords around ‘Best Execution’. Beneath the surface of these, what is Best Execution and how can it be achieved?

Best Execution refers to the duty of investment firms to take all sufficient steps to obtain the best possible result when executing client orders. The new requirements of MiFID II extend the responsibilities for investment firms to ensure they have established procedures and processes to record and assess relevant metrics after a trade has been executed. Therefore, Best Execution is a process. A process where data feed informed decisions for delivering the best possible result throughout a trade’s lifecycle.

A well-written order execution policy can be the cornerstone for providing relevant information to clients, while the key information documents (KIDs) provide details for the product prior to purchase. The order execution policy must include information about;
– the execution venues and execution arrangements,
– the available type of orders,
– the available execution methods,
– the execution factors and the importance of them.

The execution factors and the monitoring procedures are of high importance to ensure the firm is taking sufficient steps to obtain the best possible result when executing client transactions. Among others, the firm needs to be able to show;
– how the pre-traded quoted prices are constructed,
– what are the costs of each transaction,
– what is the speed and likelihood of execution,
– how slippage is handled,
– how the firm will fill in varying size of orders.

In parallel, the firm must have in place procedures to perform regular, periodic assessments of the post-trade analysis and checks to be carried out. Further, a what-if analysis is needed and if it indicates any changes required to the current procedures, those need to be carried out.

Delivering best execution is significant, even vital for companies. Exercising these best practices will allow the company to be prepared for a best execution inspection from the regulator. Being compliant helps avoid fines and distractions from the core business which is client acquisition. It enhances the reputation of the company with its current and future clients’ trust, and the regulators. All these, add value to the company’s brand.

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.

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