Transaction Cost Analysis A-Z

Transaction Cost Analysis A-Z — November 2008

V. Trading Performance Measurement

in what the best execution obligation is able to achieve with regard to the fair protection of all parties. 33

of best execution for professional clients must consider factors that include not only fees but a wide range of elements that can be used to qualify the quality of a trade, namely “price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order”. Next, retail clients are said to have achieved best execution when they have received the best price net of expenses. This means that the net price should usually be the most important element; the other factors play a limited role. Finally, trades executed between firms categorised as “eligible counterparties” 32 fall outside the scope of the best execution obligation. Begun as an obligation of result in a principle-based regulatory approach, the best execution obligation has been actively fought by industry representatives and has slowly turned into a more modest obligation of means that remains complex and ambiguous. Furthermore, as a direct result of the underlying complexity of defining best execution, the regulator has shifted the focus to the means rather than simply to the result. By providing only partial guidelines on how investment firms should assess the quality of execution through a double system of criteria and factors to be taken into consideration, but without determining how they will actually work, the regulator has frustrated all industry participants, with those seeking a principle-based approach left only with an overly prescriptive rule and those seeking the definition of precise criteria for complying with the obligation left with too much flexibility in the application of Article 21. This situation has led to significant resistance and mistrust

32 - This category refers to the most experienced firms operating in the marketplace, such as professional trading firms and asset managers

executing client orders. 33 - For more detail on

MiFID and its best execution obligation, see D’Hondt and Giraud (2007).

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An EDHEC Risk and Asset Management Research Centre Publication