Best Execution

Best execution is the FINRA Rule 5310 duty to use reasonable diligence to ascertain the best market for a customer’s order and obtain a price as favorable as possible under prevailing market conditions.

The SIE® tests the duty’s scope and the factors behind “reasonable diligence.” The obligation applies whether the firm handles the order in agency capacity or fills it as principal from its own inventory, and it covers more than price alone: the character of the market for the security, the size and type of the order, the speed of execution, and the likelihood the trade actually completes all count. A market maker’s displayed quote, and the bid-ask spread around it, is the starting point for the analysis, not the end of it.

The trap: best execution is owed automatically on every customer order, even when the customer never asks about routing or price. And accepting payment for order flow does not excuse the duty. A firm cannot route orders to whichever venue pays it the most if that venue delivers worse terms than another market reasonably available.

Example: a firm routes every customer order to an affiliated dealer even though another venue is displaying a better price. The arrangement is convenient for the firm, and it is a best-execution violation.

Practice it: order types practice questions