What is Best Execution?

What is Best Execution?


Welcome to the Investors Trading Academy talking
glossary of financial terms and events. Our word of the day is “Best Execution”
Best execution refers to the imperative that a broker, market maker, or other agent acting
on behalf of an investor is obligated to execute the investor’s order in a way that is most
advantageous to the investor rather than the agent.
Let’s assume you place an order to buy 100 shares of Company ABC stock. The current quote
is $10 per share. Regardless of whether you place the order online or via phone, the broker
can choose to send the order: 1. to a broker on the floor of a major exchange
2. to a broker on the floor of a regional exchange
3. to the stock’s market maker 4. to a third market maker, which executes
trades at publicly quoted prices 5. to an electronic communications network
6. to the broker’s own firm, which might sell you the stock out of its own inventory
In our example, your broker might be able to send your order to an entity that is currently
quoting $9.75 per share, which would save you $0.25. However, that entity might take
longer to execute the trade than a third market maker might, because there are several orders
ahead of you. The wait could actually result in a worse price, especially if the stock
is volatile. As the circumstances of each order and trading
day vary, so does the determination of what best execution is.

Leave a Reply