What is Best Execution?
Best Execution is common practice in all developed markets and many emerging markets. It is a piece of regulation that requires a stock broking firm or financial intermediary to ensure they use best endeavours, when transacting in orders on behalf of a client, to achieve the best possible outcome for their client.
In Europe, the requirement of “Best Execution” is dealt with in the Markets in Financial Instruments Directive (MiFID) and it says that all financial services firms carrying out transactions on their clients’ behalf: “must take all reasonable steps to obtain the best possible result, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.
So, what does this mean for me in South Africa?
In the last few years, four new stock exchanges have opened for business in South Africa. This has been a significant development for our market, as for much of the past 130 years, the JSE has been the only exchange on which to transact.
The introduction of competition means a fundamental shift in the way brokers approach trading for their clients. In shares that have a listing on more than one exchange it has now become imperative they look across markets to ensure they are transacting at the best possible price for their client orders.
As most exchanges operate in micro-seconds, the use of modern technology in not only the most efficient way for brokers to achieve best execution, it is vital they use it to do so. A smart order router, typically known as just a SOR, automates the process. It scans the available exchanges in real time to find the best available deal.
It important to make sure your broker is getting you best execution and if not, you are probably paying to too much.