Best Execution

Lesson

Best execution refers to the duty of an investment adviser or broker to ensure that client orders are executed at the most favorable terms available, considering factors such as price, speed, and likelihood of execution.

Practice Question #1

Which of the following factors is most important for advisers to consider for achieving best execution?

A) The adviser's commission

B) The client's risk tolerance

C) The speed of trade execution

D) Impossible to determine

Select an option above to see an explanation here.

A) The adviser's commission is a factor in determining best execution. B) The client's risk tolerance is relevant to investment recommendations, not trade execution. C) The speed of trade execution is a factor in determining best execution. D) Given multiple correct responses, the answer is that it is impossible to determine.

Terms

Best Execution:: The obligation of an investment adviser or broker to execute client orders at the most favorable terms available.

Practice Question #2

What type of order requires an investment adviser to execute a trade immediately at the best available price?

A) Market Order

B) Limit Order

C) Stop Order

D) None of the above

Select an option above to see an explanation here.

A) A market order requires immediate execution at the best available price. B) A limit order requires execution at a specific price or better. C) A stop order requires execution once a security reaches a certain price. D) None of the above is incorrect.

Historical Example

In the past, there have been instances where brokers have been fined for not providing best execution to their clients. One such case involved a broker who consistently routed client orders to a specific market even though better prices were available elsewhere. This resulted in clients receiving inferior execution prices, and the broker was ultimately fined and sanctioned by regulators.

Practice Question #3

Which of the following is NOT a factor in determining best execution?

A) Price

B) Speed

C) Likelihood of execution

D) The client's age

Select an option above to see an explanation here.

A) Price is a factor in determining best execution. B) Speed is a factor in determining best execution. C) Likelihood of execution is a factor in determining best execution. D) The client's age is not a factor in determining best execution.

Real-World Example

Imagine you are an investment adviser and receive an order from a client to buy 100 shares of a particular stock. You can route the order to one of two markets: Market A, which is offering the stock at $50 per share, or Market B, which is offering the stock at $49.95 per share. In this case, best execution would require you to route the order to Market B, as it provides a better price for your client.