Mar. 19, 2023
March 19, 2023 Best execution is critical in trade execution, especially for individual investors who may not fully understand the complexities of choosing how to execute a trade. Brokers have a duty of best execution derived from common law agency principles and fiduciary obligations. However, it needs to become a rule that the SEC can enforce. Conflicted orders should not be part of the best execution rule. Without it, customers may not be aware of revenue arrangements between brokers and subpar trading firms or that they may be paying higher transaction prices. Different trading venues can offer different prices, and slower execution can lead to missed opportunities. Information leaks can inhibit a successful transaction, and less reliable settlement processes can delay receipt of proceeds. In December 2020, Robinhood was charged by the SEC with failure to satisfy its best execution obligation, resulting in an aggregate loss of $34.1 million for its customers. Robinhood made misleading statements and did not disclose payments received for routing trades to specific firms. Similarly, Citadel paid the SEC $22.6 million in 2017 to settle best execution charges for executing customer trades at less favourable pricing when a better price was available. Brokers recommending mutual funds with 12b-1 fees and revenue sharing arrangements with clearing brokers have also faced best execution charges from the SEC. Quarterly reviews of execution quality would provide transparency and accountability for the broker-dealers' practices. The proposed Regulation Best Execution is a necessary step in protecting household investors and promoting fair and efficient markets by ensuring that household investors are receiving the best possible execution for their trades. The proposed rule would provide a more detailed and comprehensive standard for broker-dealers to follow, resulting in consistently robust best execution practices. To fully realize the benefits of this proposed rule, clear guidance on how to read and interpret the data in Regulation NMS Rule 605 reports is necessary, especially for retail investors who may not have a deep understanding of the markets. The proposed rule is essential in protecting investors and promoting fair competition in the market, making it a critical step for the SEC to take.