Best Execution Obligation

## Typical Clause Language

Here's how a typical best execution clause appears in an execution policy:

> "The Company will take all sufficient steps to obtain the best possible result for its 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."

Let's break down what this actually means.

## Key Phrase: "All Sufficient Steps"

<HighlightText variant="yellow">"All sufficient steps"</HighlightText> is regulatory language that creates a duty of care, but not a guarantee. It means:

### What the Broker Must Do

- Establish and maintain effective order routing arrangements
- Monitor the effectiveness of these arrangements
- Regularly review and update execution venues/LPs
- Assess whether they're achieving best execution
- Correct deficiencies when identified

<MarginNote>The word "sufficient" is important—it doesn't require perfection, just reasonable diligence.</MarginNote>

### What the Broker Doesn't Have to Do

- Guarantee the absolute best price on every trade
- Check every possible liquidity source for every order
- Achieve better execution than all other brokers
- Compensate clients for sub-optimal execution (unless negligent)

## The Execution Factors

Brokers must consider multiple factors, typically:

### Primary Factors

1. **Price** - The exchange rate quoted
2. **Costs** - Spreads, commissions, other fees
3. **Speed** - Time from order placement to execution
4. **Likelihood of Execution** - Probability the order fills
5. **Likelihood of Settlement** - Probability the trade settles

### How Brokers Weight These Factors

Different brokers prioritize differently:

**Price-First Approach:**
"Price is generally the most important factor, except where other factors make price secondary to achieving overall best execution."

**Balanced Approach:**
"We weigh all factors based on the characteristics of each order, including order size, market conditions, and client instructions."

**Speed-First Approach:**
"For market orders in fast-moving markets, speed and execution certainty take precedence over minor price differences."

<HighlightText variant="blue">The weighting should match the broker's actual execution model.</HighlightText>

## Strong vs. Weak Language

### Strong Language (Better for Clients)

- "We **will** obtain best execution"
- "We continuously monitor execution quality"
- "We maintain relationships with multiple liquidity providers"
- "We publish execution quality statistics"

### Weak Language (Potential Red Flags)

- "We **endeavor** to provide best execution" (vague commitment)
- "Best execution on a **best efforts** basis" (minimal accountability)
- "We **may** consider the following factors" (discretionary, not mandatory)
- "Execution quality cannot be guaranteed" (disclaimer without commitment)

## Implied Obligations

Even if not explicitly stated, best execution typically implies:

### Order Routing Logic

The broker should have systematic rules for:
- Selecting execution venues or LPs
- Routing based on order characteristics
- Handling different market conditions

### Conflict Management

If routing decisions could benefit the broker at the client's expense, this must be disclosed and managed.

### Continuous Improvement

Best execution is not "set and forget"—brokers should actively work to improve execution outcomes.

## What to Look For

When reviewing this clause, ask:

1. Does the broker commit to best execution or just "try"?
2. Is there specific methodology described?
3. Are the execution factors clearly defined and prioritized?
4. Is there mention of monitoring and review?
5. Are conflicts of interest addressed?

## Example Variations

### Market Maker Version

> "As a market maker, we provide liquidity directly to clients. Best execution is achieved through our competitive spreads, instant execution, and lack of requotes during normal market conditions."

**Analysis:** Emphasizes speed and certainty over price aggregation.

### ECN/STP Version

> "We route orders to our network of liquidity providers and execute at the best available price after aggregating quotes. Best execution is achieved through our deep liquidity pool and smart order routing."

**Analysis:** Emphasizes price discovery through multiple sources.

## Red Flags

Be concerned if the policy:

- Uses "may" instead of "will" regarding best execution
- Provides no detail on how they achieve best execution
- Disclaims responsibility for execution quality
- Doesn't mention monitoring or review processes

## The Bottom Line

A strong best execution clause should:
- State a clear commitment (not just "endeavor")
- Explain the methodology and factors
- Describe monitoring and continuous improvement
- Balance transparency with practical limitations