Best Execution
Best execution compliance in a global context
Mike Channing
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Head of Sales, UK and EMEA
January 13, 2025
Best execution has become a cornerstone of financial regulation, but its interpretation and enforcement vary significantly across global markets. The concept, which requires financial intermediaries to take all sufficient steps to obtain the best possible outcome for their clients when executing orders, sits at the nexus of investor protection, market structure, and regulatory oversight.
Despite the universal appeal of the principle, there is no single global standard for best execution. Instead, the regulatory framework differs from one jurisdiction to another, reflecting different market structures, investor profiles, and regulatory philosophies. This article provides an overview of how best execution compliance operates across major jurisdictions, including MiFID II in the EU, SEC rules in the US, and regulatory frameworks in other key markets.
Best execution as a regulatory concept has evolved considerably over the past two decades. While the principle has always been embedded in the fiduciary obligations of financial intermediaries, the formalisation of specific rules and reporting requirements has gained significant momentum, particularly in the wake of the 2008 financial crisis.
In Europe, MiFID II introduced some of the most comprehensive best execution rules ever seen, requiring firms to consider factors such as price, costs, speed, likelihood of execution, settlement size, nature, and any other relevant consideration when executing client orders. The regulation also introduced extensive reporting obligations, including the now-debated RTS 27 and RTS 28 reports, which were designed to provide transparency on how firms execute orders and the quality of execution obtained.
In the US, the SEC has long maintained best execution standards under its broader regulatory framework, with FINRA playing a key role in overseeing broker-dealer compliance. While the US approach differs from the EU's prescriptive rules, the underlying principle of prioritising the client's interest in trade execution remains consistent.
Under MiFID II, best execution is governed primarily by Article 27, which imposes detailed obligations on investment firms to execute client orders on terms most favourable to the client. Key requirements include:
Execution policy: Firms must establish and implement an order execution policy that outlines the measures taken to achieve best execution. This policy must detail the execution venues used, the factors considered when choosing a venue, and how the firm prioritises these factors for different categories of clients and financial instruments.
Monitoring and review: Firms are required to regularly monitor and review the effectiveness of their execution policies and arrangements. This includes assessing the quality of execution obtained on venues listed in the firm's execution policy and making appropriate adjustments.
RTS 27 and RTS 28: These regulatory technical standards were designed to enhance transparency around execution quality. RTS 27 required execution venues to publish data on execution quality, while RTS 28 required firms to report on their top five execution venues and the quality of execution obtained. However, both reports have faced criticism for their complexity and limited usefulness, leading to proposals for reform or removal under the MiFID II/MiFIR review.
Client disclosure: Firms must provide clients with information about their order execution policies and obtain prior consent before executing orders. They must also inform clients of any material changes to their execution policies.
The US approach to best execution is rooted in the common law duty of loyalty, which requires broker-dealers to seek the most favourable terms for their clients. Key regulatory aspects include:
FINRA Rule 5310: This is the primary rule governing best execution for broker-dealers. It requires firms to use reasonable diligence to ascertain the best market for a security and to buy or sell in that market so that the resultant price to the customer is as favourable as possible under prevailing market conditions.
SEC Rule 606: This rule requires broker-dealers to publicly disclose their order routing practices, providing clients with visibility into how and where their orders are executed. The rule was amended in 2018 to enhance the level of detail in these disclosures, particularly for held and not-held orders in equity securities.
Regulation NMS: The National Market System regulation sets out a framework for ensuring fair and efficient equity markets. It includes provisions such as the Order Protection Rule (Rule 611), which requires trading centres to establish policies to prevent trade-throughs (executions at prices inferior to protected quotations displayed by other trading centres).
Payment for Order Flow (PFOF): A significant area of debate in the US is the practice of payment for order flow, where market makers compensate broker-dealers for routing orders to them. While PFOF is legal in the US, it has come under increased scrutiny from the SEC, which has proposed reforms aimed at enhancing competition and transparency in order execution.
Beyond the EU and US, several other jurisdictions have established their own best execution frameworks:
UK (post-Brexit): Following Brexit, the UK has retained MiFID II's best execution requirements through its onshored version of the regulation. However, the FCA has signalled its intention to tailor these rules to better suit the UK market. Notably, the UK has already scrapped the RTS 27 reporting requirement, citing its lack of usefulness for investors.
Australia: The Australian Securities and Investments Commission (ASIC) imposes best execution obligations under its Market Integrity Rules. These rules require market participants to take reasonable steps to obtain the best outcome for their clients, taking into account factors such as price, speed of execution, and the likelihood of execution.
Hong Kong: The Securities and Futures Commission (SFC) in Hong Kong requires licensed intermediaries to ensure that client orders are executed on the best available terms. This includes considering factors such as price, cost, speed, and the likelihood of execution and settlement.
Singapore: The Monetary Authority of Singapore (MAS) has guidelines that require financial institutions to take all reasonable steps to obtain the best possible result for their clients when executing orders. Singapore's approach is principles-based, similar to the UK's post-Brexit stance.
For firms operating across multiple jurisdictions, achieving consistent best execution compliance presents a significant challenge. Some of the key issues include:
Fragmented regulatory requirements: The lack of a unified global standard means that firms must navigate a patchwork of regulatory requirements, each with its own interpretation of what constitutes "best" execution.
Data and reporting complexities: Best execution compliance requires access to extensive market data and robust reporting capabilities. Firms must be able to demonstrate that they have considered all relevant factors and made informed decisions about execution venues.
Technology and monitoring: As markets become increasingly complex and automated, firms need sophisticated technology solutions to monitor and evaluate execution quality across multiple venues and asset classes.
Cross-border execution: Executing orders across different markets and jurisdictions adds additional layers of complexity, particularly when dealing with different market structures, time zones, and settlement systems.
Technology plays a critical role in enabling firms to meet their best execution obligations. From transaction cost analysis (TCA) tools that evaluate execution quality to automated routing systems that optimise order execution, the use of technology in best execution compliance is both necessary and increasingly sophisticated.
Firms are also leveraging data analytics and artificial intelligence to improve their execution strategies. Machine learning algorithms can identify patterns in market data that human analysts might miss, enabling firms to make more informed decisions about where and how to execute orders.
As financial markets continue to evolve, so too will the regulatory frameworks governing best execution. Key trends to watch include:
The MiFID II/MiFIR review: The European Commission's ongoing review of MiFID II is expected to bring significant changes to the best execution framework, including potential reforms to the RTS 27 and RTS 28 reporting requirements.
SEC proposals: In the US, the SEC has put forward several proposals aimed at enhancing best execution, including reforms to PFOF and enhanced order routing transparency. These proposals, if adopted, could fundamentally reshape how orders are executed in US equity markets.
Global convergence: While regulatory frameworks remain fragmented, there is a growing trend towards greater international cooperation on best execution standards. Organisations like IOSCO have been working to establish principles that could serve as a foundation for greater global consistency.
AI and automation: The increasing use of AI in trading and compliance is likely to play a significant role in the future of best execution. As these technologies mature, they will offer firms new capabilities for monitoring execution quality, identifying potential issues, and optimising their execution strategies.
Best execution remains a dynamic and evolving area of financial regulation. For firms operating in a global context, staying ahead of regulatory developments and investing in the right technology and processes is essential to ensuring compliance and protecting investor interests.
