Best Execution is Not Always the Best

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

The Financial Conduct Authority (FCA) have undertaken a review of “best execution”. This is a simple principle enforced as part of the FCA’s Rule Book that requires your stockbroker to always obtain the best execution if you give them an order. That primarily means obtaining the best price where there are multiple markets on which the trade can be dealt but speed of execution, settlement terms and certainty of execution can also be taken into account. A stockbroker should be acting on your behalf and in your interests, not their own or that of a third party. This means “A firm must take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account the execution factors” to quote from the Rule Book.

Why is this important? Because otherwise a broker could place an order at an unfavourable price to you based on receiving a kick-back of some kind, or simply to their drinking pals. For example, market makers might pay for “order flow” to encourage brokers to place orders via them rather than some other market maker. Payment for order flow (PFOF) is severely restricted under the current FCA rules.

But the FCA’s review found that “many firms do not understand key elements of our requirements and are not embedding them into their business practices” and “most firms are not doing enough to deliver best execution…..”.  Reading the Review report makes it clear that some firms are continuing to ignore the rules or trying to devise ways around them.

As a retail client, you may not be aware of any failings and the price discrepancy as against the “best price” may not be large on an individual trade. But costs can mount up. For example, it has been suggested that 0.1% of the value of transactions is lost from inefficient share trading, so this matter is not totally trivial.

The failure to stick to the rules surely reflects the sharp practice that is still rampant in the City despite other recent scandals.

Roger Lawson

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