Quick definition Best execution is a regulatory requirement that brokers obtain the best overall execution for customer orders, considering price, speed, likelihood of execution, and other factors. What it is Brokers must route customer orders to venues (exchanges or ATSs) that offer the best total value. This is not just the best price; it includes factors like speed, size, likelihood of execution, and certainty. A broker cannot route a customer order to an inferior venue just because the broker has a business relationship with that venue. Why it matters Best execution protects retail and institutional customers from poor order routing. Without best execution rules, brokers could route orders to venues that pay them rebates, harming customer returns. Best execution is fundamental to fair markets and customer protection. Components of best execution Factors considered in best execution include: - Price (most important) - Speed (time to execution) - Size (likelihood of full execution) - Likelihood of execution and settlement - Commission and transaction costs - Venue fees Practical example A retail customer places a market order to buy 100 shares. The NBBO is bid 100.40, ask 100.41. The broker could route to: - Venue A: ask 100.41 (matches NBBO) - Venue B: ask 100.45 (worse, but pays the broker a 0.01 rebate) The broker must route to Venue A (best execution) even though they lose the rebate. Monitoring and enforcement Brokers must monitor their order routing to ensure compliance with best execution. Brokers maintain records of where orders were routed and prices received. The SEC and FINRA inspect brokers for best execution violations. Brokers that consistently fail to execute at the NBBO face regulatory action. See also - National Best Bid-Offer (NBBO) - Regulation NMS - Order Routing - Venue Selection
