Investment and other financial professionals have a duty to act in what they believe to be the best interests of their clients. This isn’t just an ethical responsibility – it’s a legal one. The Securities and Exchange Commission (SEC) has strict regulations and monitoring practices to protect investors.
Take “best execution.” This is a legal requirement for brokers to execute trades in the manner that’s most advantageous to their clients in the current market environment.
Clients can instruct their broker to use a particular exchange to execute their trade. However, if they aren’t given specific instructions, they have a legal obligation to act in their clients’ best interests. They shouldn’t act based on soft-dollar and other types of incentives offered by trade routing entities to execute their trades through them.
The SEC requires brokers to provide quarterly reports on the routing of their clients’ orders. This Financial Industry Regulatory Authority (FINRA) also monitors this.
Factors to consider for best execution
Brokers are required to consider several factors to determine the best execution of a client’s trade. These include:
- Price (including fees)
- Speed and settlement time
- Information leakage
- Likelihood of execution
These are all factors that affect the profitability of the trade for the client. No incentives, whether they’re soft-dollar incentives or direct payments to the broker or their employer, should be considered.
If you find yourself under investigation by the SEC or FINRA or are already facing allegations of violating the law, then it’s crucial that you understand what the best execution doctrine is. The ramifications to your career and your life are too great not to take the matter seriously.