What does Best Execution mean?

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What does Best Execution mean?

The term best execution stands for the order execution principles of financial services institutions. These principles are applied if the customer has not made any special demands when placing an order. If there is no explicit instruction from the customer, then the broker must execute the order by means of the Best Execution policy in such a way that the best possible result for the customer is achieved.

The legal basis of Best Execution

Best Execution is not a voluntary instrument for the best possible execution of customer orders, but is subject to the MiFID Financial Markets Directive and legal regulations. Its basis is Section 33a of the Securities Trading Act. According to current legal regulations, every financial services institution is not only obliged to establish a Best Execution policy, but this policy must also be checked at least once a year. The aim of this policy is to ensure that orders without any special instructions from the customer are executed in the best possible way. In order to secure this, the efficiency of the company’s execution policy, is, among other things, to be assessed in the course of the annual inspections. Also with regard to the trading venues, an annual review should determine whether the best possible result for the customer can be achieved with the regulations that have been set. In the event of significant changes to the policies, customers must be informed accordingly.

Basic criteria for the execution policy of client orders

In order to achieve the best possible order execution for the customer, financial service providers such as brokers have to consider different criteria. These criteria include:

  • the price and the costs
  • speed of execution
  • probability of execution and calculation
  • scope of execution
  • order type
  • and some other criteria

In addition, financial service providers have to consider a few other points within the framework of the regulations of best execution. These include, for example, that when assessing how an order can be executed best for a customer, the specific customer and order characteristics also have to be taken into account. Therefore, order additions such as specified limits are also taken into account. If the order issuer is a private customer, the best possible result that should be aimed for depends in particular on the price and costs. However, investment firms do not have to consider all execution venues in order to execute the best possible order. Nevertheless, the client must be informed of all trading venues which are considered suitable for the respective broker to execute the order. If execution takes place outside the regulated market, the customer’s consent is required. In such a case, the implementation of all execution principles must be comprehensible. Upon request, customers have the right to obtain proof that the execution has met the execution principles.

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