Mar. 31, 2023
Brokers owe their customers a duty of best execution derived from common law agency principles and fiduciary obligations; however it needs to become a regulation that the SEC is able to enforce. Without a best execution rule, customers might not be completely aware of the revenue arrangements made between brokers and subpar trading firms or that they might be paying higher than intended transaction prices.
Quarterly or monthly reviews of execution quality would allow for greater transparency and accountability for the broker-dealers' trading practices. This transparency is necessary in a free and fair market and will help prevent unfair trade execution.
Here are some recent specific examples:
In December 2020, Robinhood was charged by the SEC with failure to satisfy its best execution obligation, resulting in a total loss of $34.1 million for its customers. Robinhood made several misleading statements and did not disclose the payments received for routing trades to specific firms.
In 2017 Citadel paid the SEC $22.6 million to settle best execution charges and executing customer trades at a less favourable price when a better price was available.
Brokers that recommended mutual funds with 12b-1 fees and revenue sharing arrangements with clearing brokers have also fased best execution charges in the past from the SEC.
In conclusion, I believe that the proposed Regulation Best Execution is a good step in helping protect household investors and promoting both fair and effective markets by ensuring investors get the best possible execution for their trades.