Mar. 31, 2023
Best execution is a crucial aspect of trade execution for individual investors who may not possess an in-depth understanding of the intricacies involved in selecting how to execute a trade. Brokers are responsible for executing trades on behalf of their clients in a manner that is consistent with common law agency principles and fiduciary obligations. However, this responsibility should be enforced by the SEC as a regulatory rule, thereby ensuring transparency and accountability. Regulation NMS Rule 605 reports provide data that can help retail investors understand the execution quality provided by their brokers. These reports offer a detailed account of the execution quality offered by different trading venues, which can help investors compare prices and execution speeds to ensure they receive the best possible execution. Nevertheless, retail investors may not be well-equipped to analyze these reports and may need guidance on how to interpret the data. Conflicted orders should not be included in a best execution rule, as they can harm investors by directing trades to subpar trading firms. Without the best execution rule, investors may not be aware of revenue arrangements between brokers and subpar trading firms, which can lead to higher transaction prices. Different trading venues can offer varying prices, and slower execution can result in missed opportunities. Information leaks and less reliable settlement processes can also delay the receipt of proceeds. Therefore, it is crucial for brokers to execute trades in the best possible manner to ensure that investors receive optimal execution quality. In December 2020, Robinhood was charged by the SEC for failing to satisfy its best execution obligation, resulting in a 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, in 2017, Citadel paid the SEC $22.6 million to settle best execution charges for executing customer trades at less favorable 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. Regular quarterly reviews of execution quality would provide transparency and accountability for broker-dealer practices, ensuring consistently robust best execution 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 receive the best possible execution for their trades. It would provide a more detailed and comprehensive standard for broker-dealers to follow, thereby ensuring that investors are protected and markets operate efficiently. -- Armando Martinez