Mar. 31, 2023
Best execution is a critical element in trade execution, especially for individual investors who may not fully comprehend the complexities involved in selecting how to execute a trade. To ensure that investors receive the best possible execution for their trades, brokers are expected to adhere to the best execution standards. One way that the Securities and Exchange Commission (SEC) ensures brokers meet these standards is through the Regulation NMS Rule 605 reports, which retail investors must learn how to interpret. Understanding how to read and interpret these reports can be complicated, especially for retail investors with limited knowledge of the markets. The SEC has issued guidelines to help investors comprehend the reports. Investors should review the reports carefully, looking at the data that is relevant to their trade to determine if the broker has executed their trade fairly and efficiently. Brokers have a fiduciary obligation to act in their customers' best interests and must follow common law agency principles. While the duty of Best Execution is derived from these principles, it should be enforced as a rule by the SEC. Conflicted orders should not be included in a Best Execution rule, as they may not provide the best outcome for the investor. Without the Best Execution rule, investors may be unaware of revenue arrangements between brokers and subpar trading firms or that they may be paying higher transaction prices. Different trading venues may offer different prices, slower execution can lead to missed opportunities, and less reliable settlement processes can delay the receipt of proceeds. It is crucial for investors to be aware of these potential pitfalls and to work with brokers that prioritize Best Execution. Several high-profile cases have highlighted the importance of Best Execution, including Robinhood and Citadel. In December 2020, Robinhood was charged by the SEC for failure to satisfy its best execution obligation, resulting in a loss of $34.1 million for its customers. The SEC found that Robinhood had made misleading statements and did not disclose payments received for routing trades to specific firms. 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 that recommend mutual funds with 12b-1 fees and revenue sharing arrangements with clearing brokers have also faced best execution charges from the SEC. To promote transparency and accountability for broker-dealers' practices, quarterly reviews of execution quality are necessary. The proposed Regulation Best Execution is a necessary step in protecting household investors and promoting fair and efficient markets. It provides a more comprehensive standard for broker-dealers to follow, resulting in consistently robust best execution practices. By ensuring that household investors receive the best possible execution for their trades, the proposed rule will help to promote confidence in the markets and protect investors. -- Armando Martinez